Retiree Health Accounts Attractive for Concerned Employers

Issue: You’re an employer with a traditional retiree health care plan that is very expensive. Is there a less costly alternative for you?

Answer: Consider setting up retiree health care accounts. These accounts represent a shift away from a defined-benefit approach to a defined contribution approach in employer-provided retiree health benefits.

The IBM plan.
IBM “got a lot of splash” for setting up retiree health care accounts for its employees, according to Steve Coppock, a principal at Hewitt Associates’ Health Management Practice. Under IBM’s plan, IBM will establish a retiree health account for each employee who is age 40 or older and who has at least one year of service. The company will then credit this account with $2,500 each year for 10 years. IBM’s plan illustrates the defined contribution-type approach to retiree health care in which the employer is “on the hook” only for a specific dollar amount.

When the employee is age 55 and has completed 15 years of service, he or she can retire and have access to this account. Account balances are forfeited if employees leave before fulfilling the age and service requirements. Upon retirement, the employee can use the account balance to pay for health benefits offered by IBM.

Funding the retiree health accounts.
According to Mr. Coppock, most employers do not prefund retiree health care accounts with “actual hard assets dedicated to this purpose.” Instead, employers use an accounting entry to fund the benefits.

What are the tax implications for the employer?
If the employer uses “phantom” accounts that are not funded with hard assets, the employer “doesn’t get the tax deduction until money leaves its hands.” This means that the employer can take the tax deduction when it pays for benefits (or insurance premiums) or prefunds a trust fund to back up the account balances (subject to tax limitations).”

Cite: “Philosophical shift to DC approach creates options for retiree health care programs,” Interview with Mr. Steve Coppock, CCH’s Benefit Plan Compliance, September 1999, Volume 3, Issue No. 9.

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