Employer health benefits for retirees continue their decline

Planning for retirement is tough enough – and it gets even tougher when retirement benefits you expect to receive from an employer are changed on short notice. But a growing number of U.S. employers are capping their risk of rising health insurance costs by sending retirees into private exchanges to buy coverage – often with little advance warning.

Two-thirds of employers provided retiree health coverage as recently as 1988, according to the Kaiser Family Foundation. This was usually supplemental coverage to pay for prescription drugs, cap out-of-pocket expenses or to cover Medicare’s deductibles and co-pays. By last year, that number had dwindled to just 23 percent.

Among the employers that still cover retirees, a growing number are shifting retirees into insurance exchanges. Similar to a shift from a defined benefit to a defined contribution, the expense risk is shifted from employer to retiree.

Soon-to-be-released data from Aon Hewitt, a consulting firm that operates exchanges for employers, shows that 35 percent of public and private sector employers are using healthcare exchanges for all or some of their Medicare-eligible retirees. Of those that are not, 17 percent say they will do so in the future, and another 46 percent say they are considering it.

The latest poster child for this type of change is General Electric Co, which disclosed in its annual report for 2015 that it is saving $3.3 billion by sending many of its retirees into insurance exchanges with a subsidy to purchase coverage. The changes were effective on Jan. 1, 2016.

GE’s move has prompted two lawsuits. One was by salaried workers claiming that the company broke promises it made to continue coverage and that it violated the Employee Retirement Income Security Act. The second suit was filed by a coalition of unions representing GE workers, and it claims that the change violates collective bargaining agreements. In the first case, a judge already has denied a GE motion for dismissal, but the company is also seeking dismissal of the case brought by the unions.

Healthcare is a major, unpredictable expense in retirement, so unexpected switches can affect a retirement plan. Typically, plan sponsors provide their Medicare-eligible workers between six months to one year of advance notice of these changes. Learn more in my Reuters Money column this week.

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