When You Lose Retiree Benefits
Karen was enjoying retirement after 32 years of work as a registered nurse. Her Social Security and savings provided a modest, but adequate, income and she was grateful for a generous retiree benefits package from her former employer which included a pension and health insurance.
One day she received a note in the mail saying that the hospital system she had worked for had made major changes in their retiree benefits. Most notably it was eliminating its retiree health benefits program. Karen had already registered for Medicare coverage when she turned 65 so her employer’s plan was supplemental. However the benefits she had were more generous than Medicare’s Part D standard benefit even with her Medigap policy. It offered better prescription drug coverage and lower out-of-pocket limits. Although she would not be uninsured thanks to her Medicare coverage she was concerned that not having her retiree health benefits would mean having to pay higher premiums with her Medigap plan as well as higher co-insurance and co-payment costs.
Her coworkers who had taken early retirement weren’t as fortunate. Those who had not yet reached the age of 65 were not eligible for Medicare. Several were shocked to realize that their former employer was not legally responsible for continuing to provide coverage. They were surprised to learn that they would be uninsured unless they purchased – and paid for – private health insurance on their own, which was much more expensive.
According to the Kaiser Family Foundation the number of firms that offer retiree benefits has steadily declined over the past several decades. The most common retiree (and most highly desired) benefits are pensions and health insurance. However a majority of companies and organizations in the U.S. no longer offer either.
If you are fortunate enough to have benefits from your former employer you need to take the initiative to learn the terms of those benefits. If you’re not sure what you are receiving – or eligible to receive – call to set up an appointment with a Human Resources representative. Ask for a copy of your benefit documents and review them carefully to ensure you are familiar with the benefits – what they cover, what (if anything) you need to pay for coverage, and the process involved in accessing those benefits.
In addition you will need to monitor and manage those benefits just as you would any other financial investment. If you build financial assumptions around those benefits – meaning that you made long-term financial commitments such as buying a home, or you have maintained a certain level of spending based on the monetary amount of those benefits - you could be in for some unpleasant and expensive changes if and when those benefits are reduced or discontinued completely.
There are two types of retirement savings plans that employers can offer their workers – a defined contribution plan, also known as 401k or 403b plans; and a defined benefit plan, also known as a pension plan. Employers fund pension plans for their workers and then promise to deliver a specific monthly benefit upon retirement. The amount that you are eligible to receive may be either a fixed dollar amount per month or an amount that your employer calculates based on several factors including your salary, age, number of years worked at the company, etc. Under a defined contribution plan you will be paid out benefits according to the money that you invested in the plan and how those investments performed. The value of your defined contribution plan benefits can fluctuate based on how those investments performed.
Employers are required to keep pension plan assets separate from their business assets and therefore plan assets are protected even if a major corporate event such as a merger or bankruptcy occurs. In addition, every employer is required to have a written plan document that details how their retirement plan works. You should obtain a copy of the company’s Summary Plan Description (SPD) that outlines the key plan rules. You can request a copy of your SPD at any time for free. In addition, your plan administrator must provide you with an Individual Benefit Statement upon your written request. This statement will outline your total benefits.
You should request and review your individual benefit statement once yearly to make sure that your information is correct. If there are errors contact your plan administrator.
In addition to your SPD you may receive:
- a Summary of Material Modifications that outlines significant plan changes
- a Summary Annual Report based on the plan’s financial performance from the previous year
- Notice of Significant Reduction in Future Benefit Accruals
Employers can modify or terminate their defined benefit and/or defined contribution plans at any time. While your employer can change the rate at which you receive benefits from your pension plan it cannot, by law, lower the amount of benefits you accumulated through your service and time with your company.
If you have a pension plan from your employer you may receive a Notice to Participants of Underfunded Plan in the event that the plan is less than 90% funded. The plan sponsor is required to send this notice to you within 2 months after the due date for filing their annual report. If your company terminates its defined benefit (pension) plan and does not have enough money to pay the benefits you were promised, you have protection through the Pension Benefit Guaranty Corporation (PBGC). The PBGC will pay you – and your beneficiaries – at least a portion of your vested pension plan benefits, but only up to a set limit which will perhaps not be the full amount you had planned on.
However the PBGC does not guarantee retirees’ benefits for defined contribution (i.e. 401k, 403b, etc.) plans. If your defined contribution plan is going to be terminated, the people and organizations which are financially and legally responsible for administering the plan (called fiduciaries and trustees) will be responsible for paying out the assets in the plan. If your employer goes bankrupt and you are unable to determine the fiduciary for the plan you may be able to get assistance from the Department of Labor’s EBSA (Employee Benefits Security Administration) website or by calling them toll-free at 1.866.444.EBSA (3272).
Even though most retirees qualify for and obtain Medicare health coverage from the federal government, according to the Kaiser Family Foundation one in three Medicare beneficiaries still have benefits through their employer-sponsored plan. For retirees younger than 65 (the age at which you can qualify for Medicare), an employer’s retiree health plan may be the only health insurance coverage option they have.
Private sector employers are not required by law to promise their retirees health benefits of any sort. If an employer does choose to offer health insurance coverage there is nothing in federal law that prevents them from cutting or eliminating those benefits completely UNLESS they have made a specific promise, in writing, to maintain those benefits at a minimum level.
If you have health insurance coverage from your previous employer, review your policy’s Summary Plan Description (SPD) to learn exactly what coverage you have under the plan. Your employer is required by law to give you a copy of your SPD. If there is information about retiree health benefits, and if your employer retains the right to change or cancel your coverage during retirement, language to that effect will be included in the SPD. Examples of how an employer may change their retiree health benefits program include:
- increasing the amount of your annual premium charge for coverage
- increasing the amount of coinsurance or copayments you are required to make for services
- raising the deductible that you have to make (the amount you have to pay out of pocket) before it will begin paying for services
- imposing a new cap on its contribution for its retiree health program (which would in effect reduce your coverage and/or increase your out-of-pocket costs)
- shifting to a defined contribution approach meaning that you will need to pay toward your own healthcare coverage
- changing policies for retirees and offering only a catastrophic plan plus a health savings account feature
- eliminating prescription drug coverage
- terminating all subsidized health benefits for retiree
If, however, your employer made a specific commitment to you – in writing – to ensure specific health care benefits for either a defined period of time or for the remainder of your lifetime and did not include language reserving the right to change that decision in your SPD, you should have legal coverage if the organization attempts to lower or cancel your coverage. Carefully read through your SPD and determine:
- if you will have health benefits from your former employer during retirement
- how long you will have coverage
- if the company reserves the right to change, or terminate, your coverage at any time
- if your coverage could be affected by your decision to retire early or if you choose to return to the workforce after a period of retirement
In addition to the SPD you need to open and review any correspondence your employer sends you including letters, newsletters, brochures, booklets, employee handbooks, etc. to see if they contain information about the coverage provided through, or duration of, retiree health benefits.
If you get correspondence in the mail that your former employer is changing your benefits there are a few important steps you should take:
- Get in touch with the person listed as the contact for retiree benefit programs (or the specific plan – i.e. health plan, pension plan, etc.) on the notification you receive. Confirm what you understand the note to say and ask, specifically, how the change will affect you.
- Complete any paperwork you are sent, make a copy to keep for your files and return the documents by the deadline date (if applicable).
- Review your budget and ensure that you have allocated enough of your monthly income to cover your new (or increased) expenses.
- Contact a lawyer if you are uncertain about the legality of the changes your former employer is making.
Your group health plan must give you at least 60 days’ notice when it is reducing your insurance benefits. If you learn that your health insurance coverage has been reduced you will need to review the coverage you are extended through the revised plan and determine if it’s adequate for your healthcare needs. If not you will need to explore other options for insurance.
If your health coverage is being cancelled, by law you can maintain your coverage for up to 36 months through COBRA (Consolidated Omnibus Budget Reconciliation Act) BUT you will need to elect COBRA coverage within 60 days from your notice, and you will have to pay the total cost for the coverage – meaning you will need to pay both your portion and your previous employer’s portion. Your coverage will be discontinued if you become eligible for Medicare.
However if your former employer is filing for Chapter 7 bankruptcy and will cease to exist you may not be able to get coverage through COBRA because the group plan that you participated in will be dissolved. You will want to find out from the plan administrator how outstanding health claims will be paid and when you will receive a certificate of credible coverage (necessary to demonstrate previous coverage in order to obtain a new policy).
To ensure that you have health insurance after your current plan expires, you will need to do one of the following things:
- register for Medicare (if you are eligible)
- purchase private insurance through an insurance broker
- determine if you qualify for coverage through a state high-risk pool
- get coverage through your spouse (if applicable)
- return to work – either with your previous employer or another employer that offers health insurance
If you get correspondence from your pension or retirement savings plan administration that your benefits are being changed, or that the plan is underfunded or bankrupt and unable to continue making its payments to you:
- contact the person noted on the correspondence to learn how the changes will directly affect you. Confirm the name of the institution who will be acting as trustee in charge of the pension plan during the bankruptcy proceedings. Ask how accrued benefits will be paid out. Make notes of your conversation and keep them on file with your important retirement-related documents.
- determine if you are covered by PBGC (the answer is “yes” if you have a defined benefit/pension plan; “no” if you have a defined contribution plan). If so contact the PBGC to learn how much of your current benefits you will continue to receive and how (i.e. lump sum, monthly payments, etc.)
- calculate how the change will impact your current budget. How much less income are you now projected to receive, and for how long? How will your new income affect your strategy to draw down your retirement assets, investments and savings?
- determine what budgetary and lifestyle changes you will need to make in order to maintain your standard of living on your new, lower income. Consider if your new income amount changes your spending priorities. Consider talking with a financial professional to learn about your options and for tools in making those personal financial decisions.