Since the advent of Medicare Part D in 2006, employers have had the opportunity to lead their retirees to private individual retiree health coverage, and make it more affordable via a subsidy.

Back then it was for Medicare supplemental and wrap-around plans. But the advent and growth of private and public health care exchanges in the wake of the 2010 enactment of the Affordable Care Act has begun expanding employers’ horizons to consider subsidizing pre-Medicare eligible retiree health benefits through the individual market.

Last year, about one-fourth of employers with at least 200 employees offered some form of pre-Medicare eligible retiree health coverage, according to Kaiser Family Foundation research. And a new survey of large employers by Towers Watson is showing growing interest among some of those companies in using private exchanges as a conduit to public exchanges for high-value coverage for that under-65 segment of their retiree population.

Role of HSAs

Already nearly half (42%) of surveyed employers offering retiree health to pre-Medicare employees use account-based health plans with high deductibles tied to health savings accounts. Those employers generally cap their contributions to early retirees’ health benefits. That sets the stage for those employers to remove pre-Medicare eligible retirees from participation in the employer-sponsored health plans, leading them instead to individual policies.

While some employers have encouraged those early retirees to purchase coverage on their own in public exchanges in hopes of their eligibility for tax credits that would reduce retirees’ cost of coverage, other employers prefer providing a fixed subsidy to those retirees, assuring their ability to secure individual coverage at an affordable rate.

No subsidy double-dipping

That’s because not all retirees are eligible for tax subsides on public exchanges due to income limits, and none can receive tax subsidies in addition to a subsidy from their former employers, notes John Barkett, director of Towers Watson’s Health Policy Affairs for Exchange Solutions. If they did and the IRS got wind of it, those retirees would have to repay the IRS those tax subsidies.

However, employers can subsidize employees via those stand-alone HSAs and send retirees to the public exchanges via a private exchange interface, but make it clear they cannot seek tax credits.

Subsidies provided to retirees via a stand-alone HSA are tax deductible for the employer and nontaxable for the retiree.

When early retirees are covered in a carve-out of an employer’s basic health plan for all employees, the underlying insurance costs are higher due to the demographics of that pool. But when pre-65 retirees buy coverage through an exchange, they are part of a broader risk pool with individuals of all ages. The ACA’s mandated broader insurance “age band” rate structure assures that these retirees won’t get stuck with exorbitantly high rates, according to Barkett.

“As individual markets become increasingly robust, it will only look more viable for employers to consider this approach for their pre-Medicare eligible retirees, instead of keeping them in their own plans,” he adds.

The Towers Watson survey found that 35% of employers believe that by 2017, public exchanges will be a viable option for pre-Medicare retirees.

Richard Stolz is a freelance writer based in the Washington, D.C. area.

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