As employers look to trim retiree medical obligations, they are considering whether to establish health reimbursement arrangements (HRAs) for retirees to buy insurance from insurance exchanges established under the Patient Protection and Affordable Care Act (PPACA)—a so-called “soft landing.” The exchanges raise new issues, however, that require close consideration.
Employer-provided retiree medical coverage has been on the wane for some time. The introduction of insurance exchanges is expected to expedite the curtailment and elimination of these benefits, because individuals will have full access to individual health insurance policies through the exchanges. Although coverage through the exchanges should be available at least by 2014, there are possible impediments to such a strategy.
New Legal Issues with the Exchanges
The typical design for limiting retiree medical exposure under the “soft landing” approach is for the employer to establish HRAs for its retirees and credit those HRAs with a specified contribution amount. The retirees are then free to use the amounts credited to their HRAs to purchase coverage through the exchanges or otherwise offset their medical costs. Nobody really knows how the exchanges will work, though. New issues could lead to litigation—under the Employee Retirement Income Security Act, the Labor Management Relations Act, and state laws. Employers and other plan sponsors could face various issues in implementing a “soft landing” strategy, including:
Exchanges Are Untested
Many experts predict the public exchanges will be confusing, complex, and burdened with regulations. The coverages offered under the exchanges may not be “affordable” even if they only provide “essential health benefits.” In fact, it is generally accepted that the cost of coverage will go up before it trends down over the years following implementation of the exchanges.
Private exchanges are being advertised as more competitive, efficient, and user‑friendly than their public counterparts. They promise more assistance to ease transitions, and to be available sooner—in 2013. They may also suffer from conflicts of interest, though, to the extent they are run by private sector consulting firms, industry groups, or even insurance carriers that may also have economic interests in securing contracts or improving profitability.
Duties as to Selecting, Implementing, and Monitoring the Exchanges
If a fiduciary chooses a particular private exchange, it will want the best option possible for its retirees, who could be unhappy with an exchange viewed as inferior to the competition or the public exchanges. Further, such a selection could trigger claims for breach of the fiduciary duty of prudence, as the selection of any third-party service provider can do. In this rapidly-evolving market, fiduciaries could need to keep up with the latest developments and adjust accordingly.
Courts are starting to consider whether changes to medical benefits are “reasonable” in light of the health care market, the retirees’ current benefits, and the other benefits the employer offers. An employer could be expected to make sure the chosen exchange offers comparable coverage, with only “reasonable” modifications to existing coverages provided under the employer-sponsored plan.
It is unclear how much responsibility employers will have after the retirees’ accounts are established and the exchange has been selected. Employers may want to ensure the transition goes smoothly and the exchange is monitored, to make sure the chosen exchange remains the best option for retirees. If an employer knows or should have known of problems with the exchange, it might want to make sure they are fixed, or consider other options.
Potential Communication Breakdowns
Retirees are likely to be confused about the exchanges, at least at first. They will seek advice from employers and current insurers, and need reliable information.
Information will come from multiple sources, and it is unclear who will be responsible for which communications and for assuring a uniform message with respect to the transition to the “soft landing” design. Employers will need to communicate the changes to retirees and address transition issues. Exchanges should inform of policies and services. Individual insurance carriers provide benefits information. Unions may also seek to communicate with retirees who were members of a collectively bargained unit prior to retirement.
In all the confusion, retirees may receive conflicting, misleading, or inaccurate information. Or they may receive no information, and have no idea how to even obtain coverage.
State Laws Could Apply
For complaints about an exchange or “garden-variety” negligence, it is possible that neither ERISA nor the LMRA will preempt state laws. Employers could face varying responsibilities, expanded remedies, and greater exposure.
If an exchange fails, retirees will likely look to employers and insurance carriers. Public exchanges could leave retirees with no recourse except from their employer.
Five Ways to Give Retirees a “Soft Landing”
Every situation is different, but there are at least five ways to help make sure the transition is smooth and exposure is limited.
(1) Prudent Investigation, Selection, and Implementation
- Review governing documents to determine the extent to which benefits have vested, whether reservation of rights clauses are included, and whether modifications can be made.
- Consider whether a suit seeking declaratory judgment is available to clarify what your documents mean and how coverage can be modified.
- Research the exchanges, carefully consider conflicts of interest, and obtain other outside opinions.
- Consider offering choices, or an agreement with retirees or unions.
(2) “Reasonable” Modifications
- Compare your old coverage to what the exchanges offer.
- Consider other health care benefits you’re offering, including any disparities between retirees’ and active employees’ benefits.
- Know what your retirees actually use and expect, and whether it is available from exchange-based coverage.
- Know what competitors and industry leaders are doing.
- Consider whether transition periods could make modifications more reasonable.
(3) Proper Documentation
- Keep records of the investigation and communications with the exchanges and advisers.
- Document the considerations, pros and cons, and reasons for decisions.
- If you are amending a plan, memorialize that the amendment process was according to the requisite procedure.
(4) Thorough Communication and Successful Implementation
- Decide what the exchange, the employer, and the insurer will communicate to retirees, and document that it was communicated.
- For retirees’ questions, there should be a hotline, website, and address—and records of inquiries and responses.
- Surveys can help ensure retirees receive material information and are not confused or misinformed.
- Issues should be monitored and addressed as they arise, so they do not recur—either to multiple retirees, or to one retiree multiple times.
(5) Expert Consultation
- As always, with any big transition, obtain independent advice from qualified advisors and consultants at every step of the way.