Exactly how the subsidy will work—and how companies will maximize the benefits to employees—is still uncertain. Experts warn that providing coverage that wraps around the Medicare plan can be tricky, thanks to the "doughnut hole" that is built into the benefit. Medicare does not cover a retiree's out-of-pocket drug expenses if they fall between $2,250 and $5,100; above that point, catastrophic coverage kicks in. Employer dollars would not count against employee out-of-pocket expenses.
Meanwhile, about 8 percent of companies have simply dropped their prescription-drug coverage since the Medicare reform act was passed.
Shape of The Future
Increasingly, companies are trying to find ways to encourage employees to save their own money for medical costs in retirement. The new health savings accounts (HSA) established by the 2003 Medicare Drug Act are one option. They allow employees to save up to $2,650 pretax per year for medical care. The employee-owned accounts are portable and allow funds to accumulate tax free.
HSAs, though, can't do much for those in or near retirement. Cara Jareb, director of retiree medical consulting at Watson Wyatt Worldwide, says she is seeing "a newfound interest" in health reimbursement arrangements for retirees, which allow employers to credit a discrete amount of money toward retiree medical benefits to individual employees over any length of time.
The accounts cannot be tapped before retirement and typically do not vest until then, meaning they do not require continuous funding. The approach may not reduce liabilities, but it does limit cash outflow in a more appealing way than a cap on benefits. "It gives employees a lot more flexibility," says Jareb, "and it sends a more positive message to tell retirees how much money they have, rather than how much they have to kick in."
Considering the current lack of choices for maintaining retiree medical benefits, the real message may be that employers are doing their level best to live up to promises made to workers.
Alix Nyberg is a contributing editor of CFO.
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