Health & Human Services

Does the New Obamacare Rule Hurt Government Efforts to End Retiree Health Care?

The IRS will start penalizing employers for sending their employees to the health exchange -- a cost-saving move that a few big cities and counties have done to their retirees.
by | May 28, 2014
Illinois members of the American Federation of State County and Municipal Employees union rally in support of lawmakers not cutting spending for retiree health care.
Illinois members of the American Federation of State County and Municipal Employees union rally in support of lawmakers not cutting spending for retiree health care. AP/Seth Perlman
 

A new ruling from the Internal Revenue Service will likely discourage employers from sending workers to the health insurance exchanges with a tax-free stipend to save money, but cities and counties that are applying the idea to retirees are in the clear.  

The new rule, first reported by the New York Times, says larger employers that offer stipends to employees to purchase individual plans on a private or public insurance exchange will have to pay a tax of $100 a day per employee. The IRS decided that those payment plans violate the Affordable Care Act’s rules against coverage limits and providing preventive care at no cost to patients.

But the IRS ruling declared that the law's rules and penalties don’t apply to group health plans with fewer than two current employees, leaving governments to experiment with retiree health benefits. The latest penalty, which applies to employers with at least 50 workers, is separate from the penalty for not providing any insurance at all. That penalty, called the employer mandate, charges larger employers a $2,000 penalty per employee, excluding the first 30 workers.

Governments, unlike a number of larger employers, have typically been reluctant to ditch their health plans for current employees, and that hasn’t changed under the Affordable Care Act. “There are places where they’ve very seriously considered it, but those are more the exceptions than the rule,” said Paul Beddoe, deputy legislative affairs director for the National Association of Counties.  “We’re more worried about the Cadillac tax [on health plans with generous benefits].”

One outlier has been Milwaukee County, where officials have floated a plan to give workers tax-free subsidies to purchase coverage on the state’s federally-run exchange. County officials couldn’t be reached for comment on the IRS ruling.

But a number of cities and counties have looked to the exchanges to save money on health care for retirees who are not yet old enough for Medicare. The cities have generally been quicker to address retiree health costs than states, but their efforts have met with mixed results. A circuit court ruling last year in Illinois found the state constitution’s protections for pension benefits did not extend to health care, while a California judge found last year that Los Angeles’ attempt to limit contributions to retiree health care constituted an illegal reduction in promised benefits.

Chicago workers filed a separate suit last year when Mayor Rahm Emanuel became the first city leader to phase out health benefits for retirees who aren’t yet eligible for Medicare, sending them to the insurance exchanges where they can apply for federal subsidies in place of the city subsidies that will no longer be offered. The city is going ahead with the plan despite the suit, which has yet to receive a ruling. Detroit became the second big city to move in that direction, but it’s maintaining subsidies after reaching a compromise with unions through a court-mandated mediator. About 60 major U.S. cities have $126 billion in retiree health costs, with only about 6 percent of those liabilities funded, according to the Pew Charitable Trusts.

Counties such as Wisconsin’s Sheboygan have followed Chicago’s lead, opting to move retirees to the health exchanges without offering additional subsidies.

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