The vast majority of employers intend to continue offering health care plans to employees, but many likely will stop coverage of retirees as a result of the new health care reform law, according to a survey released Tuesday.

Eighty-eight percent of employers responding to a Towers Watson & Co. survey said they definitely or likely will continue providing coverage to employees. Just 3% said they are likely to drop coverage and instead pay the annual $2,000-per-full-time-employee penalty that starts in 2014. The remaining 9% said they haven’t yet decided what to do as a result of the change in federal law.

On the other hand, 43% of respondents said they are likely to eliminate or reduce retiree medical plans.

One key reason that employers may eliminate or reduce retiree coverage is that there won’t be the same need by retired workers, especially those not yet eligible for Medicare, because of the new law. Retirees will be able to secure coverage—with no restrictions on pre-existing medical conditions—through new state health insurance exchanges, with lower-income individuals eligible for premium subsidies.

“If the legislation works as intended, the robust individual health insurance market that exists for Medicare-eligible retirees will extend to pre-65 retirees,” Towers Watson said of the survey of 661 employers. “That could allow employers to exit their sponsorship of retiree medical programs while still providing any desired financial subsidies to their retirees.”

For Medicare-eligible retirees, the need for employer-provided plans also will decrease. That is because the reform law will expand prescription drug coverage available through Medicare Part D. At the same time, the value of a tax break now provided to employers offering drug coverage at least equal to Part D will be cut back starting in 2013.

Most employers expect the requirements embedded in the law, such as offering coverage to employees’ adult children up to age 26, will increase their health care costs. For example, 60% anticipate that the law will increase their costs moderately, while 30% say the cost impact will be significant. Just 1% said the law will decrease their costs moderately, while 5% didn’t know and 4% thought there would no impact on their costs.

As for the positive aspects of the law, 89% of employers surveyed say the law will reduce the number of uninsured, and 56% say it will improve access to care.

The survey, “The Impact of Health Care Reform on Employers,” is available at www.towerswatson.com.