Employers Likely To Shift Retirees To Private Exchanges

Companies are likely to continue to shift away from employer-sponsored retiree health plans and move retirees to private exchanges, according to recent research from PricewaterhouseCoopers (PwC). The report, Market Trends in Retiree Healthcare and Financial Reporting Implications, observes that this will mimic the shift over the last decade from defined benefit pension plans to defined contribution retirement plans. PwC noted that as companies change retiree health benefits, they need to consider the substance of the change and the related accounting implications.

Background. The Patient Protection and Affordable Care Act (ACA) created public health insurance exchanges, which are an online marketplace for individuals and small businesses to purchase health coverage. While private exchanges have been around for several years, the ACA created interest in private exchanges for both active employees and retirees. “The increased attention due to these recent developments, coupled with a continued focus by employers on ways to mitigate rapidly rising retiree health care costs, has accelerated changes in the design of retiree health care benefits plans,” according to the report.

Issues to consider. When employers move retirees to a private exchange, a change occurs to the financial aspect of the retiree health care benefit plan, PwC noted. This change could range from an alternate level of subsidy to the outright termination of the program. PwC provides several issues to consider for employers that are thinking of moving retirees to a private exchange plan:

• Elimination of retiree health plans. An employer may eliminate retiree health care benefits for all current and future retirees without providing any substitute compensation to employees or retirees. Employers also may amend its plan to provide a reduced level of benefit for some period until the ultimate wind-down of a plan. In these cases, the plan would need to be remeasured, according to PwC, and would constitute a negative plan amendment.

• Change in employer subsidy to a fixed amount. Employers that shift retiree benefits from a traditional employer-sponsored group health plan to a private exchange will likely continue to provide a fixed annual subsidy to retirees. In this case, the nature of the benefit obligation has changed, but will continue to represent a defined benefit approach.

• Retiree dropout assumption. Over time, employers have been shifting a larger portion of the cost of retiree health care benefits to participants, and as a result, have seen the level of participation in retiree plans steadily decline. When estimating the cost of providing the subsidy to retirees, it is not atypical for employers to use an actuarial assumption anticipating future dropouts among the current participant population.

For more information, visit http://www.pwc.com/en_US/us/tax-services/publications/insights/assets/pwc-retiree-healthcare-trends-financial-reporting-implications.pdf.

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