With employer cutbacks in retiree health care benefits expected to accelerate, a small but increasing number of companies have started to introduce retiree medical accounts as an alternative to their traditional retiree medical benefits, according to a recent Watson Wyatt study.
With a retiree medical account (RMA), an employer contributes a fixed dollar amount to an account, which the retiree uses to purchase health insurance. While contribution formulas differ, employers typically credit a fixed dollar amount for each year the employee participates in the plan.
In the Watson Wyatt sample of 56 large employers, annual credits ranged from $750 to $2,500 per year of participation, and interest rates on the accounts ranged from 5 to 7.7 percent both before and during retirement.
According to the study, only 2 percent of large employers have RMAs for current retirees. However, 7 percent have adopted them for future retirees and 13 percent have RMAs for new hires. Most of these plans limit participation to employees who have met minimum age and service requirements, concentrating benefits on older, longer tenured workers.
"At a time when employers are looking to rein in health care costs and place more decision-making into the hands of retirees, retiree medical accounts are a viable alternative to traditional retiree health care plan designs," said Joe Martingale, national health care strategy leader at Watson Wyatt. "These accounts encourage retirees to be more judicious consumers by giving them more autonomy, better information and a financial stake in the cost of their health care."
The Watson Wyatt report also notes that RMAs can be especially valuable to employers that have completely eliminated retiree medical coverage or their contributions toward these plans, as well as employers that have never offered a retiree medical benefit.
"Many companies are concerned that they will have difficulties hiring and retaining certain skilled and professional mid-career employees because they do not offer retiree medical coverage. That problem will only grow worse as the workforce ages and the trend away from employer-provided retiree medical continues," said Martingale. "RMAs offer a way for these employers to provide a limited benefit with significant appeal to mid-career employees."
Watson Wyatt & Company, the primary subsidiary of Watson Wyatt & Company Holdings (NYSE: WW), is an international human capital consulting firm that provides services in the areas of employee benefits, human resources technologies and human capital strategies. The firm is headquartered in Washington, D.C., and has more than 4,200 associates in 61 offices in the Americas and Asia-Pacific. Together with Watson Wyatt LLP, a leading European-based consulting partnership, the firm operates globally as Watson
Wyatt Worldwide. Watson Wyatt Worldwide has more than 6,300 associates in 88 offices in 30 countries.
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