Retiree Coverage (Benefit Tips ® - © 1999)
Retiree benefits pose a significant risk and should be avoided unless they are essential to achieving the objectives of benefits program. Retiree benefits vest upon retirement and cannot be subsequent reduced by plan amendments. Even if insurers are no longer willing to insure retirees, the employer has a legal obligation to provide coverage.
Companies must recognize retiree benefits as a deferred compensation liability and accrue the cost during an employee's working years. Calculating the liability for retiree benefits is complex because turnover, mortality, inflation and utilization need to be considered. The calculation can be dramatically simplified if a defined contribution health spending account is used to eliminate the inflation risk.