Retiree Medical and Health Benefits Face Budget Cuts

Healthcare benefits that have been promised to retirees are typically funded on a “pay-as-you-go” (also known as “PAYGO”) basis. As the cost of healthcare premiums and services rises, it becomes more difficult for municipalities and corporate plans to fund this rapidly growing budget expense.

Retiree medical benefits fall under the category of Other Postemployment Benefits (“OPEB”). These are defined as non-pension benefits that municipal governments, corporations, and others may provide to their retired employees. Healthcare costs are the most common form of OPEB, but benefits could also include dental, vision, life insurance, and other services.

U.S. cities and states are faced with the need to balance budgets at a time when annual revenue is declining by up to 13 percent due to COVID and healthcare costs are rising by 4 percent, according to a November Wall Street Journal article titled, “States, Cities Cut Retiree Health Perks.”

Prospective retirees who have not yet reached the Medicare age of 65 might find themselves working longer than they expected to continue receiving health benefits. For retirees under 65 who lose healthcare coverage, they may need to get back into the job market to cover unexpected medical costs.

States and Retiree Medical Benefits

Unfunded retiree health care liabilities for U.S. states stood at $628 billion in fiscal 2018, according to S&P Global. The rating agency expects that unfunded liabilities will continue to grow in the future if meaningful funding progress and/or benefit reductions are not implemented.

Some states, like New Jersey, Michigan, Connecticut, Kentucky and Texas, have taken steps to better fund retiree health care costs by reducing benefits, increasing participant payments, or tightening eligibility requirements. Nevertheless, only three states-Alaska, Oregon, and Arizona-have retiree medical funding levels of 75 percent or greater. As many as 17 states have not pre-funded any level of retiree health care costs.

Corporate Cuts in Retiree Medical Benefits

Private-sector employers are not required to promise retiree health benefits, according to the Employee Benefits Security Administration within the Department of Labor. If employers do choose to offer retiree health benefits, federal law allows them to cut or eliminate those benefits unless they made a specific promise to maintain the benefits. Furthermore, unlike pension plans, there is no requirement to fund these benefits other than on a “pay-as-you-go” basis.

The Summary Plan Description (“SPD”) is a written document that provides each plan participant with a summary of the terms of their plan. In the case of retirement, the plan in effect at the time of retirement is generally the governing document. If the SPD for a retiree medical or other OPEB plan reserves the right to change the terms of the plan, participants may lose coverage at any time during their retirement.

Briggs & Stratton, a Wisconsin-based manufacturer of small engines and lawn mower parts, cut retiree medical benefits as part of a 2020 bankruptcy plan. Employees were being given the right to continue the benefits at their own expense.

The Village of Boys Town, a Nebraska municipality and headquarters for the nationally-known community, announced in November that it will discontinue health benefits for about 130 retirees due to COVID costs.

Dominion Energy Transmission Inc. won a lawsuit in June that allowed it to cut retiree medical benefits. In its ruling, the U.S. Court of Appeals for the Third Circuit determined that the plan documents did not include any provision that expressly vested retirees with medical benefits.

The Future Outlook for Retiree Medical Litigation

The combination of more than $600 billion in retiree health care liabilities and a pay-as-you-go funding system is likely to generate contentious litigation in future years, particularly given the financial burden that COVID puts on state and local governments. Retirees who rely on expected healthcare benefits will turn to the courts in pursuit of relief. These issues are technical in nature, and plan sponsors will want to seek qualified legal guidance and the assistance of retiree medical experts.

About Pension and ERISA Expert Mark Johnson

Mark Johnson, Ph.D., J.D., is an experienced pension and ERISA expert. As a former ERISA Plan Managing Director and plan fiduciary for a Fortune 500 company, Dr. Johnson has practical knowledge of plan documents as well as an in-depth understanding of ERISA obligations. He works as an expert consultant and witness on 401(k), ESOP, and pension fiduciary liability; retiree medical benefit coverage; third party


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