Rising health care and pharmaceutical costs, together with the increased medical expenses associated with longer life spans, all complicate an employer's ability to accurately predict the long-term costs associated with employee and retiree health care benefits. As a result, employers are finding it increasingly difficult to provide cost-effective health coverage for their active employees and even more challenging to provide retiree health coverage.
Apart from rising health care costs, an added challenge to employers is Governmental Accounting Standards Board Statement 45 (GASB 45). GASB 45 requires state and local governments to account for other post-employment benefit (OPEB) expenses in their financial statements and related footnotes. Historically, governments have typically accounted for the cost of retiree health benefits on a pay-as-you-go basis, reporting just the amount paid each year for employees who have already retired. The new accounting standard requires governments to not only account for benefits for the current year, but also for the unfunded value of benefits promised to employees and retirees for future benefits and for the unfunded benefits earned for their service in prior years. GASB 45 requires that unfunded liabilities be amortized over a 30-year actuarial time period. The magnitude of the OPEB liabilities was much more obvious after the accounting standard was implemented. To address these large OPEB liabilities, many state and local governments have reduced the health benefits offered to employees upon retirement.
Defined Contribution (DC) health accounts are one of the options being considered in order to reduce the cost of health care plans and still provide some type of health care benefits to employees and retirees. Under a DC approach to health care, employers agree to contribute a specific amount to an employee's account each year of active employment. Employees can use funds to purchase the plan of their choice, perhaps among a group of employer approved options providing a variety of benefit designs. Some DC health plans may involve setting up a medical savings/spending account. One of the goals of DC health coverage is to give participants greater flexibility in making benefit decisions. It also encourages participants to be price-sensitive and educated consumers of health care. Since payment under a DC plan is limited to the amount that was agreed to be contributed to an individual's health account, the government's cost is no longer affected by increases in health care costs.
Plan sponsors have decisions to make with regard to eligibility for and distribution of benefits from DC retiree health plans. Benefits could be made at termination of employment, but some plan sponsors may want to set minimum age and service requirements (e.g., age 65, age 55 and 10 years of service). Some states only offer coverage up to Medicare eligibility. According to a study by The Center for State and Local Government Excellence, most states require those retirees who are eligible to enroll in Medicare. This makes Medicare the primary payer of health care bills and the state insurance plan the secondary payer.
While most entities will find that rising health care costs and GASB 45 present significant challenges they also present an opportunity to carry out a disciplined review of the current program from each of these perspectives. For more in-depth plan design information, as well as case studies, see NAGDCA article, “Retiree Health Savings Plans for Public Sector Employees.”http://www.nagdca.org/content.cfm/id/retiree_health_savings_plans#3
Neither NAGDCA, nor its employees or agents, nor members of its Executive Board, provide tax, financial, accounting, or legal advice. This memorandum should not be construed as tax, financial, accounting, or legal advice; it is provided solely for informational purposes. NAGDCA members, both government and industry, are urged to consult with their own attorneys and/or tax advisors about the issues addressed herein.
National Study Tracks Ongoing Efforts to Trim Employee and Retirees Costs:http://www.cobaltcommunityresearch.org/images/stories/2011_HealthStrat/OPEB2011%20FINAL.pdf
GASB 45 Q&A: https://www.gasb45help.com/GASBhelp_Brochure.pdf
State and Local Government Retiree Health Benefits: http://www.gao.gov/new.items/d1061.pdf