Retiree Coverage

Please Note: This Geek Out! page identifies some of the issues that are particular to employer-sponsored retiree health coverage. No attempt has been made to touch on every possible issue or to exhaust the discussion in those areas which are addressed.  As always, a review by each employer’s own legal counsel is recommended prior to implementing or changing any benefits for retirees. For purposes of this discussion, the term “retiree” will be synonymous with “former employee.”

Retiree-Only Plans

In some case, the extent to which a law applies to a plan covering retirees depends on whether the plan also covers any active employees.  Some employers provide coverage for active employees and retirees under the same plan. A retiree-only plan is one that covers fewer than two participants who are active employees.

Whether a plan that covers an employer’s retirees is separate from the plan the covers that employer’s active employees is a facts and circumstances determination: factors include whether the plan’s legal documentation establishes that they are separate; whether separate filing and reporting obligations were fulfilled for both plans; and, whether the plans were in fact operated as separate plans.

The Public Health Service Act (PHCS) and Tax Code all contemplate the provision of health coverage by an employer to its retirees and their dependents. However, a health plan’s legal obligation to retirees is not always the same as its obligations to active employees.

The material below summarizes many of these differences.

Please Note: This article identifies some of the issues that are particular to employer-sponsored retiree health coverage. No attempt has been made to touch on every possible issue or to exhaust the discussion in those areas which are addressed.  As always, a review by each employer’s own legal counsel is recommended prior to implementing or changing any benefits for retirees. For purposes of this discussion, the term “retiree” will be synonymous with “former employee.”

ERISA

The ERISA definition of a plan participant includes both current and former employees.

Fiduciary Considerations:  Employees contemplating retirement sometimes ask employers whether they are considering making material changes to their retiree benefit plans. The Supreme Court has held that it is a breach of fiduciary duty under ERISA for an employer to make misrepresentations about prospective changes. However, lower courts have disagreed about the point in time when a proposed change is sufficiently under consideration as to obligate disclosure. They have likewise disagreed about the impact of “materiality” on the disclosure obligation. Employers faced with such questions should consult with counsel to ascertain the test most likely to be applied by the courts.

Vesting of Retiree Benefits:   There has been a lot of litigation arising from employers’ attempts to reduce or eliminate retiree coverage. ERISA does not require health benefits to vest (in contrast to pension benefits). This means that ERISA itself does not prohibit employers from changing or even eliminating benefits for retirees. However, the wording of the plan and other promises made to employees may create a contractual obligation to maintain benefits at a particular level. Collectively bargained plans frequently face these issues. Employers should review their plans, contracts and other communications to make sure they have not created any vested rights with respect to future benefits.

HIPAA

Plans that cover only retirees are not subject to HIPAA’s portability and nondiscrimination rules.

Special Enrollment:  Plans that cover both active and retired employees do have to apply HIPAA Special Enrollment rules to retirees and their dependents.  However, the special enrollment rules do differ for retirees.

• If a retiree is not covered under the plan, no special enrollments rights apply. For example, a retiree who is not covered on the date he or she marries has no special enrollment rights.
• If a retiree is covered on the date of marriage, then he or she may add the new spouse and any children that becomes eligible as a result of the marriage.
• If a retiree is covered on the date of a birth or adoption, the retiree may add the new child and an existing spouse.
• Neither the retiree nor any member of the retiree’s family acquires any special enrollment rights as a result of a loss of other coverage, even if the retiree is covered under the plan on the date of the event.
• Special enrollment rights arising out of the termination of Medicaid or related to eligibility for state assistance do not apply to retirees or the dependents.

Administrative Simplification:  HIPAA’s administrative simplification rules (i.e., privacy, security and EDI rules) apply to retiree-only plans to the same extent they apply to plans for active employees.

COBRA

COBRA applies to group health plans without regard to whether they are retiree only plans.  If a person becomes covered under a retiree-only plan, COBRA initial notices are required.

Termination of employment due to retirement is a COBRA qualifying event and COBRA must be offered if the retirement causes a loss of coverage. A loss of coverage will occur even if the employer offers retiree coverage, unless the retiree remains covered under the plan for active employees and the coverage is identical in all respects.  Even if the coverage is identical, a loss in coverage will occur if the employer requires retirees to pay more for coverage than the cost for similarly situated active employees.  It will also occur if the retirees are switched to a separate plan, regardless of the coverage provided.

If an employer provides (and the employee elects) retiree coverage in lieu of COBRA coverage, the retiree coverage is subject to COBRA. While termination of employment will no longer be a qualifying event, loss of dependent coverage due to death, divorce, entitlement to Medicare or a child ceasing to be eligible will be qualifying events.

The employer’s bankruptcy can be a qualifying event for retirees and their dependents who lose coverage in connection with the bankruptcy. This includes a substantial elimination of coverage within one year before or after the commencement of the bankruptcy proceeding.

Health Plan Mandates (Other than Under the ACA)

There are numerous federal statutes that mandate that group health plans provide certain types of benefits. Those statutes may or may not apply to retirees or retiree-only plans. This section identifies a number of those statutes.

Age Discrimination in Employment Act (ADEA)

This statute prohibits discrimination against employees over 40 on the basis of age. This includes retirees; however, EEOC regulations allow employers to reduce or terminate retiree coverage when retirees become 65 and eligible for Medicare.

Other Statutes

The mandates imposed by the following statutes do not apply to retiree-only plans:

• Mental Health Parity and Addiction Equity Act (MHPAEA)
• Newborns’ and Mothers’ Health Protection Act of 1996
• Women’s Health and Cancer Rights Act
• Michelle’s Law

The following statutory requirements do apply to retiree only plans:

• Qualified Medical Support Orders
• Coverage for Adopted Children
• Coverage for Pediatric Vaccines
• Genetic Information Nondiscrimination Act of 2008

Health Plan Mandates Under the ACA

In general, the ACA does not apply to retiree-only plans.  However, certain provisions do apply.  These include:

• Provisions related to reinsurance contributions.
• Payment of fees to support the Patient-Centered Outcomes Research Institute (PCORI).
• Early Retirement Reinsurance Program (however, this program is no longer accepting applications).

If an employer is required to provide a W-2 to a retiree, then it must include the cost-of-coverage reporting.  Otherwise, this does not need to be reported for retirees.

If an employer covers retirees and active employees under the same plan, then all the ACA mandates will apply to the retirees.

Tax Law

Employers can deduct and retirees can exclude from income the value of medical benefits provided by a former employer.  This includes reimbursing retirees for premiums spent on individual coverage.

Non-Discrimination:  Benefits provided to a retiree who was a highly compensated individual may be considered discriminatory unless the type and dollar limitations of benefits are the as those for all other retired participants.

Cafeteria Plans:  A cafeteria plan can provide coverage for retirees; however, it cannot be established predominantly for the benefit of former employees.

HSAs:  Employers can contribute to a retiree’s HSA, assuming the retiree is otherwise eligible.  Of course, a retiree who is enrolled in Medicare will not be eligible. Similarly, coverage under a general purpose HRA will disqualify the retiree.

If an employer makes the contributions outside of a cafeteria plan, former employees are treated as a separate category for purposes of comparability testing.

HRAs:  Employers can provide an HRA to retirees.  If offered as a retiree-only plan, it will not be subject to the ACA’s coverage mandate.   Some employers fund a HRA with a VEBA to which it can contribute over the working lives of the prospective retirees.   Within specified limits, amounts contributed to such pre-funded HRAs may be deductible by the employer.  Retiree HRAs can also be funded through unused vacation and sick leave which would otherwise be paid upon retirement, provided that the employee does not have an opportunity to elect to receive cash in lieu of such contribution.