Individual Benefit Accounts: The Solution to the Cost of Post Retirement Medical Care and More

Individual Benefit Accounts (IBAs) are an innovative approach which permits employers to provide a number of benefits to its workforce with a minimal commitment by and expense to the employer. IBAs can generally include: (1) Medical Benefits; (2) Post-Retirement Medical Benefits; (3) Death Benefits; (4) Post-Retirement Death Benefits, or (5) Disability Benefits.
Individual Benefit Accounts: The Solution to the Cost of Post Retirement Medical Care and More

How do we attract and retain valuable, trained employees? All companies at some time must address this question. In addition to offering competitive rates of compensation, employers must offer competitive benefit packages. A simple current health plan and a 401(k) Plan with a modest match are simply not enough. Nor do they provide employees with sufficient retirement security.

Your employees are living longer and are becoming increasingly aware of the dangers and costs of long term care, disability, premature death, and post retirement health care.   There is no way your benefits package can adequately protect your employees from all of these risks.   How can you offer your employees the benefits they want without hurting your bottom line?

The Conversion Experience: Defined Benefit to 401(k)
The solution to this problem lies in borrowing a chapter from the late 1980s and early 1990s. Between 1985 and 1995 approximately 50% of the Fortune 500 companies and hundreds of other smaller corporations terminated their defined benefit pension plans and replaced them with 401(k) plans of various incarnations. In doing so, they cut their average cost of benefits from almost 15% of payroll to 6% of payroll or less. And in addition, they accomplished this conversion with most workers unaware that they were actually losing benefits.
How did they accomplish such a bold transformation? With a combination of "smoke and mirrors". Since most employees didn´t really understand their pension plans anyway, the employers were able to "sell" the employees on the idea that they were now in control of their own economic destiny. Employees would now control their investments rather than the trustees. Employees could contribute as much as they wished up to the limits imposed by IRS. And the employer would even magnanimously "match" the employees´ contributions up to a predetermined level.
Never mind that most of the contributions were now being made by employees rather than the employer.

Are health benefits and retirement benefits similar? Will the same approach work with respect to employee benefit plans?

Individual Benefit Accounts

Individual Benefit Accounts (IBAs)   are an innovative approach which permits employers to provide a number of benefits to its workforce with a minimal commitment by and expense to the employer.   IBAs can generally include: (1) Medical Benefits; (2) Post-Retirement Medical Benefits; (3) Death Benefits; (4) Post-Retirement Death Benefits, or (5) Disability Benefits.   Collectively-bargained plans may also include (6) Education Benefits and (7) Severance Pay Benefits.   The IBA may be used to pay or reimburse pre-retirement medical benefits (if that option has been elected by the employer).   The portion of the IBA which has not been used prior to the participant´s retirement is available for payment or reimbursement of medical expenses after retirement.   In the event of the participant´s death before or after retirement, the balance of the IBA will be paid to the named beneficiary.   Or, if a participant incurs a qualifying disability prior to retirement, the IBA may be used to supplement his compensation (to the extent the employer´s short- or long-term disability benefit plan does not maintain the participant´s earnings level).   Just like changing the deductible under a health insurance policy, the benefits provided through a IBA may be amended as needed by the adopting Employer from time to time.    

To adopt a IBA the employer establishes a tax-exempt trust fund and makes contributions at a level it can comfortably afford. The contributions are allocated to the individual accounts (IBAs) of the eligible employees. Employees add their own contributions to the fund, direct the investment of funds, and receive statements just like a 401(k) plan.
An IBA has the advantage of three types of plans rolled into one:   Like the Medical Savings Account ("MSA") it rewards healthy individuals by tax deferred accumulation of funds, like the 401(k) retirement plan it allows employees to control investments with no limit on growth, and like the Flexible Spending Account 125 plan it pays or reimburses 213(d) medical expenses with tax free dollars.

These elements have all of the comparative advantages that 401(k) plans had over defined benefit plans a decade ago. Moreover, in adopting or converting to IBAs, Employers seem to avoid the problems of more traditional retiree medical plans: no FAS 106 liabilities to report, costs are limited to current year commitments, and such plans can be terminated at will (except for collectively-bargained plans).

During the late 1980s and early 1990s a large number of Fortune 500 (and many other) companies discontinued expensive defined benefit pension plans in favor of 401(k) plans with matching employer contributions, and achieved a savings of approximately 9% of payroll in doing so.   Many similarly-situated companies are today looking to get out from under expensive employee benefit and retiree medical plans.   Through IBAs, all of these objectives may be accomplished, and ultimately the employer will realize significant savings.   And, as happened with 401(k) plans, employees who are empowered and informed are happier and more productive.   Will employee benefit plans go the way of defined benefit plans? It´s too early to tell, but with IBAs it is likely that more and more employers will choose the safe, responsible route of funding what they know they can afford, and pass the risks on to their employees.

The HR industry´s premier online community and resource for Human Resource professionals: HR, human resources, HR community, human resources community, HR best practices, best practices in human resources, online communities for HR, HR articles, HR news, human resources articles, human resources news, HR events, leadership, performance management, staffing and recruitment, benefits, compensation, staffing, recruitment, workforce acquisition, human capital management, HR management, human resources management, HR metrics and measurement, organizational development, executive coaching, HR law, employment law, labor relations, hiring employees, HR outsourcing, human resources outsourcing, training and development
hr.com. human resources management resources for hr professionals. | HR menus | HR events | HR Sitemap