Webinar

COBRA and Retiree Health Risk

How PPACA has provided new options for employers

Presented by

Patrick C. Haynes, Jr., Esq., LL.M.

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Patrick C. Haynes, Jr. Today’s Presenter

As counsel for Crawford Advisors’ Employee Benefits and Executive Compensation Group,

Mr. Haynes advises employers and plan sponsors in a variety of health and welfare benefit plan

compliance matters, including, but not limited to, tax qualification and other Internal Revenue

Code issues, ERISA, COBRA and HIPAA portability and privacy issues. Mr. Haynes lectures

frequently and has published many articles on health and welfare benefit plan compliance

topics.

Practice Areas Employee Benefits & Exec Comp, ERISA, COBRA, HIPAA, §125, and §§ 105, 106, 129, 132

Education Temple University School of Law, LL.M.

Rutgers University School of Law, J.D.

Rutgers University School of Business, M.B.A.

Rutgers University College of Arts & Sciences, B.A.

Admitted to Practice U.S. Supreme Court

Federal and State Courts of

New Jersey

Pennsylvania

Connecticut

District of Columbia

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Health Care for ex-full time employees

COBRA

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The Consolidated Omnibus Budget

Reconciliation Act of 1985* • Enacted by Congress & Pres. Reagan; COBRA created

program that allows employees that leave employment for

certain Qualifying Events to be eligible to remain on the

employer’s healthcare- plan at full cost.

• These Events include:

• Termination

• Loss/Reduction of Hours

• Death (family inherits coverage)

• Divorce

*Law didn’t become effective until April 7, 1986

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COBRA Health Costs

• Traditionally, the only healthcare option for terminated employees has been COBRA coverage.

• This type of coverage allows terminated employees to stay on their employer’s health plan for 18 months (and in special cases up to 36 months).

• The cost for the terminated employee is the full premium (w/out employer contributions) and a 2% administrative fee.

• Depending on how much an employer contributes, this can mean a 200-900% increase in the premiums that employees are used to paying.

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COBRA Health Costs continued…

• COBRA coverage is not only more expensive for employees, but it also is can be costly for the employer.

• Although employers are exempt from paying premiums, they still are responsible for the claims.

• The average COBRA employee has a 150% claim to premium ratio. That is nearly twice the percentage compared to active employees.

• Because of the price of premiums, many employees only pay the COBRA premium if they have a condition that would prevent them from getting more affordable coverage elsewhere.

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Retiree Health Plans

FAS 106

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FAS 106

• FAS 106 is a mandate enacted by the Federal Accounting Standards Board that provides accounting standards for retirement health plans.

• The SEC and accounting profession were the two main drivers behind the policy, their goal being to “to establish and improve accounting and reporting standards; to enhance the credibility, faithfulness and fairness of financial statements.”

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FAS 106 continued…

• Regulators were prompted to

change the reporting standards because employers weren’t adequately budgeting for future liabilities under the former “pay as you go” methodology.

• General Electric in the early 1990s reported that it budgeted $1.77 billion for retiree health coverage. It’s actual liabilities were $2.7 billion.

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Retiree Health Costs

• FAS 106 did nothing to increase retiree health costs, it simply helped employers recognize the magnitude of their existing liabilities.

• Many employers were forced to amend their plan designs, or get out of retiree health insurance all together.

• The baby boomer generation, coupled with an increase in life expectancy, has severely reduced the number of employers that offer traditional pensions and retiree health insurance.

• 20 years ago, 80% of large employers offered some type retiree health benefits. That number is reduced to about 50% today (Forbes).

• There are still significant numbers of employers/unions providing >65 retiree coverage & <65 retiree coverage.

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EXCHANGES

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Alternative Options

• COBRA and retiree health coverage are inherently prone to expensive coverage due to the demographics they pull from. People with pre-existing conditions and the elderly incur significant claims.

• Finding creative ways to mitigate cost can be difficult, but the enactment of the Affordable Care Act has opened up some interesting possibilities for both offerings.

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Public Exchanges

• The Affordable Care Act created public Health Insurance marketplaces, or “exchanges” where consumers can shop for healthcare.

• These exchanges are meant for individuals who are buying health insurance for themselves, or small group employers who can provide insurance through the Small Business Health Options Program (SHOP).

• These public exchanges can be run by state governments, the federal government, or a partnership of both.

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Private Exchanges

• Private exchanges had already been in use prior to PPACA, but they are certainly going to play a bigger part in the marketplace going forward.

• These exchanges are not run by the government, but rather by a private sector company like a consulting firm or health plan.

• In private exchanges, employers can select the options they want to show their employees. These exchanges aren’t limited to health insurance, as employer’s can also offer dental, vision, etc.

• Crawford “Private Exchange” debuts November 4th – providing options for healthcare <65, >65 & auto & homeowners

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COBRA Implications

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Making an Informed Decision..

Crawford’s Exchange or other private/public exchanges is a way for terminated EEs & ERs to cut COBRA costs and for employees to make an informed decision on their health coverage.

Would-be COBRA enrollees can…

• Compare COBRA premiums to individual premiums available on exchanges.

• Check to see if they qualify for state assistance. E.g. Medicaid, CHIP, etc.

• Look at the latest regulatory information to see if they qualify for any federal subsidies.

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Public Exchange

• Plans in the public exchange must cover a set of 10 essential health benefits.

• If an individual is between 100% and 400% of the federal poverty level they will qualify for health insurance subsidies ($11,490 and $45,960 for an individual in 2013).

• The average monthly cost for single coverage in an employer-sponsored plan is $490 (Kaiser 2013). The average premium for an individual in a mid-level plan in the public exchange would be $336 (Avalalere Health).

• An employee that is eligible for COBRA coverage would have to pay the full $490 plus an extra 2% for COBRA administration.

• Additionally, if an employee elects for COBRA coverage and decides that he/she wants to switch to the exchange will have to wait until the Exchange’s open enrollment period to do so.

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Compliance Items

• Benefit exchanges must adhere to both ERISA and HIPAA.

• The objective is to protect privacy and present information in a clear, transparent and objective format.

• Protected health information should not be given to administrators or brokers that are involved with the exchange.

• Plans should be presented in an unbiased format that does not funnel the individual to a specific carrier, or away from COBRA.

• Exchanges should include information on:

• COBRA rights

• Underwriting

• Guaranteed Issue

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Benefits

• Guiding COBRA eligible individuals to an exchange reveals their post-employment options.

• It debunks the false dichotomy that the only two options for termed employees are COBRA coverage or no coverage.

• A private exchange can be a versatile option, as it can be built to include information on dental, vision, drug and life and disability.

• The public health exchange could be the most affordable. The lack of a pre-existing limit condition and the opportunity for subsidies could offer a cheaper alternative to COBRA.

• In exchanges employees can also build their plan to fit. High deductible plans could prove to be a more affordable alternative to traditional plans. Cutting fat out of rich PPO plans can significantly cut annual costs.

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FAS 106 implications

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Rethinking Retiree Health Plans

• For employers that value retiree health plans and the benefits they bring to employees are already rethinking how they offer their benefits.

• IBM and Time Warner have already announced plans to move retirees into private health exchanges.

• Employees are offered defined contribution health plans (HRAs), which they will use to shop different plans on public or private exchanges that have been approved by the company.

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Defined Contribution Plans

• As was discussed earlier, HRA offerings can be a smart alternative to PPOs with low deductibles and copays.

• When employers choose to provide a defined contribution, retirees can elect exchange options.

• Defined contribution also offers a way in which to offset/negate/comply with the PPACA “Cadillac Tax,” which is set to begin in 2018.

• Mitigate inflationary aspect of FASB calculations.

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Evolving Marketplace

• Although more people will enroll in the public exchanges at first, a study by Accenture predicts by the year 2018 more people will be enrolled in private exchanges (40 million) than public exchanges (31 million).

• Private exchanges will have more freedom in benefit offerings, free from the standardization that will restrict the federal exchange.

• Groups that self-insure will be exempt from the state insurance mandates.

• Private exchanges can also be personalized much like existing plans. They can be designed to include wellness benefits. The quoting competition between carriers will also mirror the current market, devoid of the exchange regulations.

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CONCLUSIONS

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Take-Aways

• COBRA and retiree costs are expensive.

• Offering defined contribution health plans to retirees may be a more affordable way to maintain retiree health plans as costs increase.

• These plans can be used to facilitate the tax free transfer of funds to purchase coverage through public/private exchanges.

• Showing COBRA eligibles that they may be able to get more affordable health care through exchanges could save money for both the employer and the employee.

• Defined contribution plans are becoming a popular way to handle the increasing health costs and burdensome PPACA regulations.

• Employers don’t have to “realize/recognize” the future liability for traditional retiree medical coverage

• The responsibility is placed back on the retiree to become an active player in making plan design choices (while giving the ER fixed cost – a known expense value)

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Crawford Advisors, LLC

200 International Circle, Suite 4500, Hunt Valley, MD 21031

Devon Square Two, 744 West Lancaster Avenue, Suite 215

Wayne, PA 19087

800-451-8519 • www.CrawfordAdvisors.com

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