Health care benefits that have been promised to retirees are generally funded on the basis of a “pay-as-you-go” (also known as “payment”). As the cost of health care premiums and services rises, it becomes more difficult for municipalities and corporate plans to finance this rapidly growing budget spending.
Retiree medical benefits are included in the Other Post-Employment Benefits (“OPEB”) category. These are defined as non-pension benefits that municipal governments, corporations, and others can provide to their retired employees. Healthcare costs are the most common form of OPEB, but benefits could also include dental, vision, life, and other services.
US cities and states face the need to balance budgets at a time when annual revenues are declining by as much as 13 percent due to COVID and health care costs are increasing by 4 percent, according to a November Wall Street Journal article titled “States, Cities Reduce Retiree Health Benefits.”
Future retirees who have not yet reached the age of 65 on Medicare could find themselves working longer than expected to continue receiving health benefits. For retirees under 65 who lose health care coverage, they may have to return to the job market to cover unexpected medical costs.
State and retiree medical benefits
Retiree unfunded health care liabilities for US states totaled $ 628 billion in fiscal 2018, according to S&P Global. The rating agency expects that unfunded liabilities will continue to grow in the future if significant advances in financing and / or reductions in benefits are not implemented.
Some states, such as New Jersey, Michigan, Connecticut, Kentucky, and Texas, have taken steps to better fund retiree health care costs by reducing benefits, increasing participant payments, or tightening eligibility requirements. eligibility. However, only three states – Alaska, Oregon and Arizona – have withdrawn medical funding levels of 75 percent or more. Up to 17 states have not pre-funded any level of retiree health care costs.
Corporate cuts to retiree health benefits
Private sector employers are not required to promise retiree health benefits, according to the Department of Labor’s Employee Benefits Security Administration. If employers choose to offer retiree health benefits, federal law allows them to cut or eliminate those benefits unless they have made a specific promise to keep the benefits. Also, unlike pension plans, there is no requirement to fund these benefits other than “pay-as-you-go.”
The Summary Plan Description (“SPD”) is a written document that provides each plan participant with a summary of the terms of their plan. In the case of retirement, the plan in effect at the time of retirement is generally the governing document. If the SPD for a retiree health plan or other OPEB plan reserves the right to change the terms of the plan, participants may lose coverage at any time during their retirement.
Briggs & Stratton, a Wisconsin-based manufacturer of small motors and lawn mower parts, eliminated the withdrawn medical benefits as part of a bankruptcy plan for 2020. Employees were being given the right to continue benefits for your own account.
The Village of Boys Town, a Nebraska township and nationally renowned community home, announced in November that it will discontinue health benefits for around 130 withdrawals due to COVID costs.
Dominion Energy Transmission Inc. won a lawsuit in June that allowed it to cut retiree health benefits. In its ruling, the US Court of Appeals for the Third Circuit found that the plan documents did not include any provision expressly granting retirees medical benefits.
The Future Outlook for Retiree Medical Litigation
The combination of more than $ 600 billion in retiree health care obligations and a pay-as-you-go financing system is likely to lead to contentious litigation in the coming years, particularly given the financial burden that COVID imposes on state and local governments. . Retirees dependent on expected medical benefits will go to court for help. These issues are technical in nature and plan sponsors will want to seek qualified legal guidance and assistance from retired medical experts.
