Early Retiree Health Subsidy Program Take-up Could be High

May 25, 2010 (PLANSPONSOR.com) –Most companies that offer pre-65 retiree medical benefits intend to apply for the Early Retiree Reinsurance Program (ERRP) to offset a portion of health care claims costs for retirees ages 55 to 64 and their families.

A survey of 245 large-sized employers in May 2010 by Hewitt Associates found 76% of companies plan to pursue reimbursement under the ERRP, under which companies can receive an 80% reimbursement on claims incurred by early retirees and dependents between $15,000 and $90,000 over the course of a year. It goes into effect June 1, 2010.

A news release said Hewitt estimates that the average federal reimbursement will represent between $2,000 and $3,000 per pre-65 retiree per year, or approximately 25% to 35% of total health care costs. As an example, for a company that covers 1,000 pre-65 retirees, participation in the ERRP could result in $2 million to $3 million in reinsurance proceeds per year.

While the law requires that employers use the ERRP reimbursements to reduce the cost of the plan, Hewitt’s survey showed that most have not yet decided on a specific approach.

Sixty-six percent of companies that intend to apply for the reimbursement said they are unsure about how they plan to use the proceeds and are waiting for guidance before making a decision. Sixteen percent said they are considering using the reimbursement to reduce premiums—including both employer and retiree share – and another 5% said they are considering reducing the retiree share of premiums only.

“The number of employers eliminating pre-65 retiree medical benefits has grown over the past decade as health care costs continue to rapidly increase,” said Milind Desai, senior consulting actuary and co-leader of Hewitt’s Retiree Health Care Task Force, in the news release. “But because so many companies plan to apply for the ERRP, employers will need to act quickly to secure a share of the proceeds, since the federal funds earmarked for this program are limited.”