Early Retirement Packages: Healthcare is a Key Consideration

By Chris Maikels

Principal, National Retiree Solutions Leader for Mercer Marketplace

The pandemic’s economic impact has been far-reaching, but it hit the airline industry especially fast and hard. As airlines went into survival mode, they offered buyouts and early retirement packages to cut staffing costs. Delta Airlines was able to reduce their workforce by 17,000 this way, and Southwest Airlines saw similar results.

Of course, the airlines aren’t alone. As the economic fallout continues into 2021, many companies are revamping their staffing strategies and some are considering retirement incentive offers to help meet their targets. An important piece of the offer equation is healthcare coverage, since the ability to pay for healthcare expenses is a key consideration for employee when deciding whether to accept a retirement package.

In weighing the different types of support to offer retirees – group coverage, individual coverage, COBRA, Health Reimbursement Arrangements (HRAs), cash lump sums, or possibly a combination -- the challenge will be to balance the overall costs of the program while making the healthcare related benefits attractive enough to alleviate your employees’ concerns. Clear communications are critical to the program’s success and it will be important to have the right administrative support for retirees when rolling out the program and managing benefits in the future. Here are a few considerations for employers weighting their options.

For early retirees under age 65:

Continue active coverage until the retiree turns 65. This common approach is attractive to employees because it is familiar and easy to understand and it typically results in the highest participation rate. Self-funded employers retain claims risk and, depending on how much you subsidize coverage, costs are likely to be high. One option is to vary the contribution over time; for example, by fully subsidizing COBRA for 18 months and providing a monthly contribution thereafter. An administrator can assist with enrollment, retiree billing (if applicable) and maintaining eligibility.

Health Reimbursement Arrangements (HRAs). Employers may choose to provide funds and let employee seek coverage on their own. By providing an annual HRA that reimburses retirees for coverage and/or healthcare expenses as opposed to a cash lump sum, employers can spread cash costs out over time and ensure that participants are using the funds provided specifically for eligible medical expenses, including COBRA premiums. The HRA is typically a tax-preferred benefit, which also may make it more attractive than a cash lump sum. You can design the HRA credits to be periodic contributions (typically monthly or annual) or a one-time lump sum. Because participants who are still under age 65 when the COBRA period ends will need to find coverage elsewhere, this option may feel risky to younger retirees and it’s likely that large HRA credits will be needed to make this option attractive – as much as $2,000 monthly or a lump sum of $100,000 (or higher). A private exchange partner can assist retirees with individual coverage options and support, as well as handle HRA administration.

The story is a little different for Medicare-eligible participants, who will likely be more receptive to a retirement incentive package:

Retiree medical plan. Unless you provide a retiree medical plan today, you would have to design and implement one, going against the historical trend by adding this benefit. The plan design can mirror active coverage with Medicare paying primary or have a different structure, but since it can’t be known who will take a retirement package, it may be difficult to find a carrier for fully insured group coverage. With a potentially small population, it could also be difficult to take advantage of cost savings strategies within the Medicare group plan market (such as Medicare Advantage plans, Employer Group Waiver Plans (EGWP) plans). On the plus side, retirees may feel comfortable knowing that their employer is providing a plan as part of this package and have fewer concerns because Medicare is providing primary coverage. Similar to pre-65 coverage, your cost will depend on the level of subsidy provided, and engaging an administrative partner may be helpful, though it will add cost.

Health Reimbursement Arrangements (HRAs) with a retiree exchange. Retiree exchange solutions for Medicare-eligible retirees have been around for over a decade and allow employers to provide plan choice and flexibility, individual Medicare coverage, integrated HRA administration and personalized support and tools for retirees. The HRA benefit can be structured either as a recurring credit or as a lump sum. Retirees enroll in fully insured individual coverage and therefore there is no claims risk and no need to manage carriers on an ongoing basis. Employer cost is tied to the level of HRA benefit provided. Administrative costs for a retiree exchange solution are typically low due to the standardized individual commissions built into individual Medicare plans.

This option can also be delivered as a stand-alone HRA benefit, without a retiree exchange partner. In this case, retirees would need to shop for coverage on their own. While this approach may be simpler to roll out, it will not be as attractive to retirees. An exchange solution would provide the retirees with access to expert licensed benefits counselors to assist them in enrolling in the individual coverage which best meets their individual needs and circumstances.

With any new retiree medical benefit, whether subsidized coverage or an HRA benefit, an actuarial valuation (ASC715, for example) may be required to measure the post-retirement liabilities related to the present value of the new benefits promise. This may include immediate recognition of the new liabilities on an employer’s balance sheet. Employers should work carefully with their actuaries and auditors to determine the overall financial impact of the program.

Employers will also need to review administrative options and related costs, including whether a current administrator or a new partner would be best-positioned to manage the roll out and the program going forward. It will be critical to ensure that employees understand the value of the retiree medical aspect of the early retirement package; a well-designed offering and well-crafted communications could make all the difference in achieving your objectives.