Exit Strategies for Retiree Health Plans

Providing fully subsidized retiree health benefits is no longer tenable. The only question is how to correct the problem without ending up in court.

Retiree health benefits are yet another piece of the historic industrial landscape that will soon slip over the horizon. The plans have long outlived their original purpose as a tool to help regulate turnover, but they continue to generate huge liabilities for the companies that provide them. Employers are aggressively seeking strategies for shedding plans that were once considered a critical part of the retirement benefit package.

"As each year passes, retiree medical coverage becomes more rare at U.S. companies," notes Steven J. Friedman, chairperson of the employee benefits practice group at the New York City office of Littler Mendelson, a labor and employment law firm headquartered in San Francisco. "Companies are getting crushed by the mounting costs of health care. For active employees, employers' costs are quite high; for retirees, employers' costs are devastating."

Reporting requirements for retiree health plan liabilities have exacerbated the problem. The trend toward eliminating lifetime benefits started in 1992, when the FASB adopted Standard 106, notes D. Michael Reilly, partner and co-chair of the labor and employment department at law firm Lane Powell PC in Seattle. "This new rule required employers to recognize the cost of retiree benefits for current and future retirees in the current year, rather than the year the costs were actually incurred," he explains. "Since then, many employers have ended the lifetime benefit."

The liabilities are staggering, and the damage to balance sheets is severe. Almost half of Fortune 1000 companies provide retiree health benefits, and their total liability for future costs is $470.6 billion, according to the Employment Policy Foundation. If premiums continue to increase at current rates, the retiree health liability for the Fortune 1000 will reach $900 billion by 2008. The Fortune 100 companies account for $250.2 billion of this amount, and their combined retiree health and pension obligations total $1 trillion.

"Employers with and without collective bargaining contracts have taken steps to limit their expenses, and both labor and management recognize the challenges faced by businesses that bear these costs in a global, highly competitive economy," says Joe Martingale, national health care strategy leader at New York City-based Watson Wyatt Worldwide, a global consulting firm. "Nonunion employers have been able to move more quickly to redesign their retiree medical programs and are focusing on providing future retirees with support in finding access to health coverage and in developing resources to pay for that coverage." Unionized employers are examining their collective bargaining agreements for ambiguous language that may provide a way out.