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Golden Premium Account®° PlansA Response to Current Trends in Retiree Health Care Costs
Most retirees will be forced to devote a substantial portion of their retirement assets to pay Medicare Part B premiums, new Medicare Part D prescription drug premiums, health insurance supplements to Medicare (Medigap) and out-of-pocket health care costs. CBS MarketWatch reported on April 29, 2004 a 65 year-old couple retiring in 2004 will pay an estimated $175,000 (after-tax) to cover the projected out-of-pocket medical costs for the next 20 years. Long-term care costs add another $130,000 to this estimate. The Employee Benefit Research Institute (EBRI) developed a model to estimate the savings an individual will need to fund either employment-based health insurance premiums or Medigap premiums and out-of-pocket expenses under various health care premium inflation assumptions and different life expectancy assumptions. EBRI estimates an individual at age 55 in 2003 with a life expectancy of age 80 with a projected 7% annual rate of increase in premium costs will need to save $158,000 for post-retirement Medigap premiums plus $98,000 for out-of-pocket expenses. Savings needed for premium costs where an individual's life expectancy is 90 years old is $297,000. Assuming a 14% rate of annual increases gradually decreasing to 5% over 10 years yields a savings requirement at 65 of $169,000 and $289,000 for coverage to last until ages 80 and 90 respectively. The model does not take into account long-term care premiums, which will likely double the savings estimates, nor does it calculate the cost of a spouse's coverage. These brief illustrations demonstrate how an individual will need access to significant savings to ensure the continuation of access to health care services enjoyed by the individual before retirement. Furthermore, that access to savings is being eroded by employers who are reducing post-retirement medical obligations in whatever fashion they can and by other employers who refuse to adopt post-retirement medical programs in the first instance. Moreover, the ability of employers to curtail post-employment medical plan subsidies to post-65 retirees has been formally approved by the Equal Employment Opportunity Commission. AARP further reinforces and advocates the importance and need for generating savings earmarked for post-retirement health needs. In an address delivered last April, William D. Novelli, AARP's CEO, stressed the need to change the long-held retirement income model of the "three-legged stool" of Social Security, pensions and savings in favor of "four pillars" consisting of Social Security, continued earnings from work, pensions and personal savings, and health insurance. Some employers have established healthcare reimbursement accounts (HRAs) for executives and employees as a source of funds to pay healthcare costs during retirement. Unlike an open-ended employer promise to provide healthcare coverage for life, an HRA typically is a notional account that allows an employer and employee to track dollars made available to the employee for health benefits during retirement. HRAs are not Health Savings Accounts enacted by the 2003 Medicare reform legislation. In response to the current crisis in funding retiree healthcare costs, the Golden Premium Account® Plan has been developed as a special purpose HRA program for executives and other key employees. The accounts in the Golden Premium Account® Plan are earmarked for health and/or long-term care insurance needs and are delivered to the executive free of income and payroll taxes while the employer gets a deduction for its contribution to the plan. A Golden Premium Account® is designed to fall under ERISA's anti-alienation protection. However, the minimum participation, funding and vesting requirements of ERISA or the Internal Revenue Code do not apply. As a result of the lack of ERISA and IRS requirements, the employer is able to custom-tailor a program to meet the employer's needs and the individual needs of its executives. The scope of the employee population that may receive a Golden Premium Account® is neither subject to a minimum nor a maximum amount as the plan is not subject to "top-hat" deferred compensation restrictions, leaving the employer with the widest latitude to manage its own liabilities while rewarding and motivating older employees at levels it sees fit. A properly designed Golden Premium Account® Plan serves as an integral component of an executive's overall deferred compensation strategy by maximizing the amount of tax-free dollars that will be available to him to meet critical retirement expenses. ° Golden Premium Account® is a trademark of Howard W. Hans hwhans@hotmail.com |
