Retiree Health Care Issues After the Affordable Care Act

Larry Bell, a member of this newsletter's Board of Editors, is the principal of Advisors, LLC, which provides solutions for underfunded pensions and OPEB liabilities. He teaches business and estate planning to actuaries, attorneys, accountants, financial planners and insurance professionals. He is a qualified expert, and testifies on taxes and benefits. Bell works with entrepreneurial, profit, nonprofit and government organizations in strategic planning on a regional, national and international basis. He served as Tax Bar liaison to the IRS for 10 years. He has received patents in actuarial product fields dealing with COLI, BOLI, GASB, FASB, IASB and OPEB solutions. He authors articles and speaks nationally about decision trees on COLI best practices, 409A and benefit planning.

Following implementation of the Patient Protection and Affordable Care Act (“ACA”), the funding and providing of promised retiree health benefits has a new series of requirements that must be met by Taft-Hartley retirement plans, employers and plan sponsors. One such requirement is that the escalating liability for post-retiree medical plans (“OPEB”) must now be carried on the balance sheet of plan sponsors. See Financial Accounting Standards (“FAS”) 106 and 157, Government Accounting Standards (“GAS”) 43 and 45, and International Accounting Standards (“IAS”) 19. In addition, the ACA now requires the acceleration of recognition, thereby increasing costs to the employer/plan sponsor, and creating new limitations with retiree drug subsidies (“RDS”). The Center for Medicare and Medicaid Services (“CMS”) has also instituted guidelines for qualifying for reimbursements to employers.

These stringent accounting rules will challenge corporate debt ratings, raise the cost of borrowing when the full annual required contributions are not made, and in turn create larger budget deficits for all types of employers. These rules affect state and local governments as well as for-profit entities such as corporations, law firms and unions, and nonprofits.

For state and local governments, the declining tax revenue environment combined with a decade of substandard investment returns makes covering the growing OPEB liability more daunting than ever before. The net effect is that Taft-Hartley plans are forced to take a number of unappealing paths, engaging in riskier investments within the pension, and shifting more of the burden of financing these post-retiree obligations to taxpayers, who ultimately must sacrifice services in order for the municipalities to meet these strict OPEB funding standards. The result is political backlash, and angry employees, pensioners and voters.

Continued underfunded status could also lead to additional compliance reporting, oversight, expenses and delays. Related problems also occur as prospective and current retirees cut back on consumer spending in hard economic times, due to not being certain that their hard-earned pensions will provide promised retirement checks and future payments. Since 2006 with the implementation of Medicare Part D, employers or plan sponsors who have provided pharmaceutical coverage to qualifying retirees equal to or greater than what is provided will be recipients of a subsidy. The amount of the subsidy is approximately 28% of the qualifying pharmaceutical spend. It works out closer to 20-25%, as there are offsets for deductible, co-pay and catastrophic coverage. These payments historically were deemed non-taxable. Since the ACA, the subsidy has been scheduled to be taxable after 2013; the proposed change in the law has made other programs more attractive.

The Employer Group Waiver Plan (“EGWP”) combines an actuarially based solution, supported by the requirements of FAS, GAS and IAS rules for underfunded OPEB liabilities, plus underwriting and administrative services, into a “one-stop” solution that:

1. Provides greater CMS reimbursement, and reimbursement occurs monthly instead of annually;
2. Provides accounting treatments that immediately offset liabilities, thereby reducing annual required contributions and real costs of benefits; and
3. Takes over HR duties that employers/plan sponsors otherwise had performed previously. This can create an immediate and ongoing savings of HR personnel salary and benefit expense, as fewer employees are needed to perform these duties.

The plan meets all compliance requirements. The Center for Medicare and Medicaid Services certifies plan providers, so installation of plans is seamless and risk free. It is the most efficient and effective management system and client service available.

Recently CMS has authorized a patented program (“the Plan”) that will provide a lump sum payment to the plan sponsor covering up through 2021. This will not alleviate the plan sponsor's duty to provide the coverage; however, it provides more flexibility to the employers, as there is no limitation to the use of those funds.

The Alternatives

Accounting rules described earlier require plan sponsors to address the previously unreported and underfunded post-retiree medical and drug coverage. If not adequately addressed, these unfunded liabilities will result in a downgrade of bond ratings, and have a substantially negative effect on an employer's ability to provide benefits to its retirees.

The options to solve the problems of unfunded liabilities are:

• Increase dues, fees or taxes;
• Arbitrage ( i.e., borrow money at a specific rate and invest those funds at a higher rate);
• Not honor the liabilities that are not guaranteed;
• Negotiate and lower benefits (a poor solution that risks employee and union backlash); and/or
• Implement the monetization of RDS and EGWP plans.

The Plan provides an asset, and in doing so satisfies all interested parties:

• Benefits recipients;
• Elected officials;
• Unions;
• Financial advisers;
• Voters; and
• Bond rating agencies

In summary, the Plan's multidisciplinary approach will qualify for an immediate and significant reduction in the valuation of the actuarially accrued liabilities for pharmaceutical benefits, and directly reduce the annual required contribution (“ARC”), saving significant dollars in an already tight budget.

The Plan will provide an employer/plan sponsor real savings versus traditional funding options. These savings will potentially allow plan sponsors to reduce and/or freeze their annual required contributions, and avoid generational theft ' borrowing from future generations without the ability to assure the repayment.

The Methodology

The employer contracts with pharmacy benefit manager (“PBM”); PBM certified by CMS to provide EGWP (“the Program”); PBM modifies the RDS arrangements with CMS with no substantive change to the formulary for participants. There is no action necessary to be taken by retirees or their beneficiaries.

There is an immediate increase in the financial distributions to the plan sponsor from CMS. Under the Program there is no requirement to provide annual actuarial certification to CMS for compliance, so there is less administrative burden and expense.

The OPEB Trust books the reduced present value prescription drug liabilities (given an actuarial discounted method). The plan sponsor may also reduce liabilities following FASB 106 Interpretive Bulletins, Tech Bulletin, 2006-1.

The plan sponsor qualifies for the Plan and obtains the present value of the CMS revenue stream up to 2021. The Program does not create any additional liability to the plan sponsor and does not negatively affect any of the plan sponsor's financial commitments.

The Program is the most economically efficient way to meet the daunting challenge. It has benefits that are multifold:

• It immediately reduces the cost of benefits for the members;
• It reduces the budget requirements of the plan sponsor to maintain compliance as we reduce the ARC and actuarial accrued liability; and
• It reduces the administrative and compliance burden for the plan sponsor and the Trust.

As presented above, the Employer Group Waiver Plan combines an actuarially based solution, in compliance with FAS, GAS and IAS requirements, plus underwriting and administrative services, into a prudent health care plan solution that will work for many firms.