Under the House version of the health care reform bill, group health plans will be prohibited from reducing benefits for retirees and their dependents unless benefits are reduced by the same amount for active employees. A reduction of benefits occurs if retirees are asked to pay a greater percentage of the premium, or if the actuarial value of the plan is reduced. In its current form, the rule in the House bill will go into effect on the date the bill is enacted into law.

The current version of the Senate bill does not contain similar language, and Congressional efforts to enact such restrictions in the recent past have been unsuccessful. The prospect that this provision will become part of any final health care reform legislation appears to be quite unlikely. If it does pass, however, the impact on employers that offer retiree health care benefits will be significant.

The House bill does not prevent employers from reducing or eliminating retiree health benefits for employees who have not yet retired. Nor does the bill prohibit employers from imposing an aggregate cap on retiree health benefits, as long as the cap is in place before retirement. But employers will no longer be able to manage retiree health care liabilities by reserving the right to amend or terminate their plans. With a few exceptions, the only way to manage retiree health care costs will be to reduce retiree benefits for employees before they retire, or reduce benefits by the same amount in the active and retiree health benefit plan. The actuarial value of benefits may be reduced by up to 5% without violating this provision, and the Bill includes a procedure for obtaining a waiver from the Secretary of Labor when an employer can show undue hardship.

Employers contemplating changes to retiree health care should consider whether to take such action now, before health care reform is enacted. It is impossible to know whether health care reform will pass or whether it will contain the provision in question. But some employers may prefer to terminate their plans now rather than risk incurring permanent liability for retiree health care costs that may continue to rise at unsustainable rates. Under current law, the ability to terminate retiree health benefits may be limited by collective bargaining agreements or past promises to vest employees in these benefits. To minimize the risk for litigation, legal review is recommended before reducing or terminating retiree health benefits.

If you wish to discuss current health care reform generally or this provision of the House bill and possible strategies for dealing with it, please contact the attorney in the Benefits and Compensation practice group with whom you work.