Adviser opening: Covering retirees

Employer-provided health care insurance for retirees is going the way of pensions, leaving many of those on the cusp of retirement with the job of shopping around for coverage.

Once a way to help workers manage health care costs during retirement, fewer and fewer employers are offering such insurance.

Last year, 17.7% of early retirees and 15.9% of Medicare-eligible retirees in the private sector had health insurance once they left the job, according to data from the Employee Benefit Research Institute. Those figures are down from 1997, when 28.9% of early retirees and 25.4% of Medicare-eligible retirees in the private sector worked at companies that offered retiree health care insurance, according to the EBRI.

But the change in the availability of these benefits presents an opportunity for financial advisers who are hoping to make health care a bigger part of their retirement planning practice. It can be especially daunting for retirees who are younger than 65, the age of eligibility for Medicare, to find coverage on their own.

“If an employer does not offer retiree health care coverage, you’re going to have to shop around,” said Bedda D’Angelo, president of Fiduciary Solutions LLC.

ACCOUNTING STANDARDS LED TO CHANGES

Employer health care benefits for retirees have been eroding over the past 20 years. A measure released in 1990 by the Financial Accounting Standards Board required employers to account for post-retirement benefits other than pensions. As a result, many companies realized for the first time how much they were paying to provide medical coverage to workers no longer on the job.

“[Employers] found billion-dollar obligations with current and future retirees,” said Jay Savan, a senior consultant at Towers Watson Inc. “They began thinking [about] a transition plan to move to a place where they could be responsible both to shareholders and retirees.”

In many cases, the solution was to cut back on benefits or shift expenses to retirees.

About three-quarters of the 501 employers responding to a recent poll by Aon Hewitt indicated that, since 2011, they have raised retiree contributions to health benefit premiums for both pre-65 and post-65 retirees. Seventy-eight percent of the companies said that they are likely to ask retirees to chip in more for premiums next year.

Companies also have been ramping up cost sharing, which includes co-payments and deductibles. Among the employers surveyed, 53% said that they will increase retiree cost sharing next year.

Public employers have used cost sharing as a way of avoiding an increase in premiums, according to Paul Fronstin, a senior research associate with EBRI.

“It may be harder to raise premiums because the public sector is highly unionized, compared with the private sector,” he said. “People are used to seeing co-payments go up, and it may be easier to have that happen than to raise premiums.”

Increasingly, employers are giving retirees a subsidy to pay for coverage that they find themselves, according to William T. Payne, partner at Stember Feinstein Doyle Payne & Kravec LLC, a law firm that specializes in employee benefits.

However, even those payments can be reduced.

Mr. Payne cited a case he encountered in which workers had a benefit that gave them a Medicare supplement of as much as $290 a month. The employer cut costs by trimming that subsidy to $85.

Some employers have hired intermediaries to help guide retirees through purchasing Medicare coverage, but advisers can help clients greatly by researching carefully what among a client’s needs will be covered by the Medicare program, or whether it is wise to buy supplemental coverage on the private market.

“Retirees get into analysis paralysis,” Mr. Savan said. “There are so many options [for care], that they can’t make a decision.”

What to look at:

Part A. The most well-known of the Medicare programs covers hospital stays and in-patient treatment. People become eligible at 65 and most people pay no further premiums because they paid FICA taxes while working.

Part B. Individuals reaching 65 must sign up for this plan, which covers physicians’ fees and outpatient treatment, and pay monthly premiums that ranged from $99.90 to $319.70, depending on 2010 income.

Part D. The newest Medicare benefit covers prescription drugs, but restrictions, premiums and prices vary widely. Depending on their 2010 income, Part D users this year will pay as much as $66.40 a month on top of the Part B premium.

Part C. Consider recommending that clients choose one of the many Medicare Part C plans, which pay for services not covered by Parts A and B. Sometimes called Medicare Advantage plans, they are bought from private carriers. Premiums average $50 to $60 per month but vary widely depending on where the person lives and the depth of coverage.

In addition, some Part C plans also cover drugs, adding another $39 per month to the average premium in 2011, according to data from the Kaiser Family Foundation.

“It’s important to look at the benefits” when choosing a private plan, said Kathryn Votava, president of Goodcare.com, a consulting firm that helps advisers manage clients’ health care costs. “Most people overspend on Medicare because they buy on premiums and not on benefits.”

NO SAFETY NET

Meanwhile, the pre-65 retiree crowd has its own issues:

Profit-sharing plans. Ask clients leaving the workplace early whether they have money socked away in such a plan that can be be dedicated to covering health care costs, Ms. D’Angelo said.

COBRA. The Consolidated Omnibus Budget Reconciliation Act requires companies to extend employee coverage to workers who leave for a maximum of 18 months. But monthly premiums for COBRA can run over $1,000 a month because insureds are footing the bill for coverage on their own, without the employer contribution.

Private insurance. In situations where employers don’t provide coverage, early retirees will have to find their own, perhaps by setting up a health savings account and a high-deductible insurance policy, according to Ms. D’Angelo.

Finding an individual policy before 65 can be especially difficult because of underwriting restrictions.

“From a planning standpoint, everyone wants to retire at 60,” said Steven R. Martin, vice president at Wolf Financial Management LLC. “That’s fine if you’re healthy, but at that age, most people aren’t and most coverage is medically underwritten.”

The Affordable Care Act, which will take full effect in 2014, will address some of those issues, including coverage for individuals with pre-existing conditions and the use of affordable health care exchanges.

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