It is not unusual for school districts to provide an incentive for employees to retire prior to Medicare eligibility by allowing them to stay on the group Health Insurance plan at the same premium as active employees. Some districts even pay a portion of the premium on behalf of the retiree.
Prior to the Affordable Care Act (ACA), viable alternatives for early retiree Health Insurance were not available. Health Insurance was not affordable due to premiums based on advancing age and pre-existing conditions. But now the Healthcare Exchange (Marketplace) may provide school districts with new options for their early retirement incentives that not only benefit the district, but also the retiree.
To better understand these challenges and explore solutions, we have interviewed two experts from National Insurance Services (NIS) and MidAmerica Administrative and Retirement Solutions, who have worked together since 2000 providing solutions to school districts and their early retirees.
In the first part of this interview series, David Branback, Director of Market Development, Retirement Income, at NIS, will explain the challenges many school districts have encountered over the years and how the traditional benefit has resulted in high costs for everyone involved.
The problem with providing early retirees with group Health Insurance
According to David Branback, there are three main problems with the current system of school district early retiree Health Insurance as it has traditionally been offered:
The hidden age-related premiums of early retiree Health Insurance
Health Insurance premiums are partially based on the age of the employees and retirees on the plan. If the premiums end up being the same for everyone, they do not reflect the true age-related cost. If the premium was broken out by age, older participants would be charged more than younger participants.
Actuaries assume that for every year a retiree is older than the average age of active employees, the premiums should be compounded by 4 percent. If there’s a difference of nearly 20 years between the average age of active employees and the retirees, the retiree premium should be twice that of active employees.
This means that every district that provides early retiree Health Insurance is subsidizing the cost of providing that insurance regardless of whether or not they pay a portion of the premium.
Defined benefit plans and OPEB liabilities
When employees are hired, their benefits package may include promises of early retiree Health Insurance coverage. Because cost is not known at the time of hire, this leaves school districts unable to determine the future cost of providing that benefit, otherwise known as an Other Post Employment Benefit (OPEB) liability.
Because many public organizations have made these promises, the Governmental Accounting Standards Board (GASB) passed GASB 45, which required school districts and other governmental organizations to have an actuary estimate the liability. The results were newsworthy. Many school districts are now funding those liabilities with long-term trusts in order to meet their promised obligation to their employees.
New retirees need choices
Benefit plans with low deductibles are enjoyed during employment when the employer pays a large share of the premium. But with escalating costs, most employers scaled back their contributions and early retirees may be paying a larger share than they had anticipated. As such, they want more options to choose from such as higher deductibles or lower benefit amounts. However, choices are limited, as early retirees usually cannot afford Health Insurance coverage outside of their employer’s group plan due to age-related premiums and pre-existing condition exclusions.
In the next part of the series, Trent Teesdale, Director of Operations at MidAmerica Administrative and Retirement Services, will explain the opportunities the Affordable Care Act can provide to school districts and early retirees as of January 1, 2014.