Without a doubt, workers need to start preparing now for their future medical needs. According to a recent Watson-Wyatt study, future retirees will shoulder substantially more of the cost of their health care in retirement. Under plans that were common in the 1980s, retirees paid 39 percent of their total lifetime medical cost, with employers picking up the rest.
But under new plans put in place by employers, it is predicted that future retirees will have to pay between 61 percent and 92 percent of their total lifetime medical costs -- that is, if an employer offers a retiree health plan at all.
Many find it difficult to sustain retiree medical coverage due to current costs and, worse, the open-endedness of future liabilities. Fortunately, a new employee benefit option has emerged in the marketplace that lets you provide employees with resources for health expenses -- but with associated costs that are flexible and predictable.
Retiree Reimbursement Accounts, or RRAs, are an outgrowth of the health-related arrangements that were enacted as part of Medicare reform legislation signed into law in 2003 to provide better tools for managing health care costs. The most prevalent of these tools is the Health Reimbursement Arrangement.
This employer-funded account reimburses employees for qualified medical expenses. An RRA works essentially the same way, except the program is designed to reimburse medical costs only after a worker retires.
Here's how it works. When you set up an RRA, employees who are actively working for you are able to receive an account. You (and only you) "credit" this account at a certain level. It's important to note that RRAs are notional accounts, which means that you do not actually have to deposit funds until the point when the retired employee requires reimbursement.
You retain control over the plan design. This means, for example, that you may determine a schedule for vesting of the credits.
If you choose to, you also may extend your RRA contributions into an employee's retirement years. There are no age limits regarding contributions to RRAs, and funds are rolled over from year to year.
Growth of the account
The RRA approach allows employees to build their RRA value year after year. Upon retirement, employees may access the funds to cover eligible medical expenses that adhere to IRS guidelines as an itemized health care deduction.
In addition to expenses for medical services, retirees also can use the funds to pay for insurance premiums, such as those for Medicare or Medigap coverage.
Should the employee die before reaching retirement, the employer may close the account or extend the benefit to the surviving spouse or dependents. In the latter case, the dependent must still use the account credits only for qualified medical expenses. They cannot be redeemed for cash.
If you think an RRA might help you better manage your retiree benefits challenges, you should investigate your options with your insurance broker or consultant and your company's financial advisers. As you search for a plan administrator, keep the following factors in mind.
* Administration. Find a company that can handle the complex behind-the-scenes account management process. This is important now, but becomes crucial once retiree claims start flowing in. Be sure the company has the skills and resources to handle things expertly.
* Information. Because RRAs are a benefit that involves future liabilities for your company, you'll want to keep a handle on what's happening within the plan. Look for a service provider that can deliver regular, comprehensive reports so that you may track contributions, balances and reimbursement activity.
With the right plan administrator, a good plan design and proactive employee communications, a Retiree Reimbursement Account can be a valuable tool for managing your retiree benefit costs -- and helping your workers prepare for the challenge of their longer-term medical financing needs.
PAUL MARTINO is vice president of sales and service, covering Illinois and Wisconsin. He is responsible for managing sales and client management for Aetna's middle market segment, which includes businesses with 51 to 3,000 employee lives. Reach him at (312) 928-3754 or MartinoP@aetna.com.