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Retiree medical benefits: the tip of the iceberg.

Retiree Medical Benefits: The Tip of the Iceberg

Retiree medical benefits will become a "nightmare" for employers, according to an expert in the field

"By the year 2050," reports W. Leon Smith, partner with Touche Ross & Co., "70 percent of a company's taxable payroll could be consumed for elderly medical benefits. That adds up to a nightmare in our future."

According to Mr. Smith, early retirement is the major reason why retiree health costs have skyrocketed. He says companies spend as much as about $5,000 a year for employees who opt for retirement at age 55. "That adds up to a cost per retiree of close to $45,000 before Medicare kicks in 10 years later to defray some of that burden."

Nature of the Commitment

In light of the tremendous continuing expense of providing retiree health benefits, some employers may find it necessary to alter their plan designs. According to Harry Burton, an attorney with the Washington, DC, firm of Morgan, Lewis & Bockius, before taking action, benefits managers should fully determine the nature of the commitment.

That commitment, or promise, can be construed differently by active employees or retirees. "Active employees usually see another day of employment attached to another day of benefits, while retirees, rightly or wrongly, think of their benefits as static and unchangeable," Mr. Burton says. "You have to remember that you are talking about people's security for their later years as well as an awful lot of money. It's an emotional issue, and you better be sure that you are on firm ground."

One way to establish that groundwork is by assembling and unifying a team of financial, legal and human resources expertise. In Mr. Burton's view, such a team will be able to thoroughly study any contractual commitment and avoid possible "recriminations."

"When doing the study," Mr. Burton says, "the team should start with employee handbooks--track them down before they get lost. Those handbooks should be analyzed in a dispassionate way. In fact, it is a good time for outside counsel to come in and help."

According to Mr. Burton, an alteration of existing retiree benefits plans comes complete with the potential of future litigation. "Even if you circulated a memo five years ago that casually said employees had a `vested lifetime benefit,' you could get litigated to death," he says. "If such a phrase was used, even out of context, then you've got a problem at least regarding employees who have already retired."

Mr. Burton says employers have "one shot" at successfully altering retiree benefits plans. "If one employee sues and wins, then the courts will look at that pensioner's argument and apply it to other arguments. The time to study is before you're in trouble," he says.
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Author:Johnson, Tom
Publication:Risk Management
Date:Jun 1, 1989
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