Capped by the disastrous launch of public health insurance exchanges, health care reform law-related issues dominated employee benefit issues in 2013, mainly related to Patient Protection and Affordable Care Act rules and guidance.
It began in February when the Internal Revenue Service issued regulations that employers would be hit with stiff financial penalties if single coverage, rather than family coverage, was deemed unaffordable. Under the final rule, employers will be hit with a $3,000 penalty for each employee whose premium contribution for single coverage exceeds 9.5% of household income and the employee uses a federal premium subsidy to buy coverage in a public exchange.
Many more compliance rules followed. For example, in July, the Treasury Department delayed by one year to 2015 a key requirement of the health care reform law that employers offer qualified coverage or pay a $2,000-per-full-time-employee penalty, citing reporting-related issues. In September, the IRS said pre-Medicare eligible retirees would lose eligibility for health insurance premium subsidies to buy coverage in public insurance exchanges if their former employers contributed to retirees' stand-alone health reimbursement arrangements.
Pension plan funding the best in five years
Buoyed by robust returns in the equities market, pension plan funding levels, much to the delight of plan sponsors, headed upward in 2013. At the close of 2012, on average, pension plans sponsored by companies in the Standard & Poor's 1500 were 74% funded, the third consecutive year that plan funding dropped. That fall came to an abrupt halt this year as the value of many stocks held by pension plans leaped. By May, plans on average were 86% funded. And in November average funding levels hit 93% — the highest level in five years, according to Mercer L.L.C. For employers, the improvement in pension plan funding will mean sharply lower contributions in the year ahead.
Pension plan de-risking efforts gain momentum
Pension plan de-risking, which entered the mainstream benefits vocabulary in 2012 when big-name employers like Ford Motor Co. and General Motors Co. unveiled trailblazing plans to shed tens of billions of dollars in plan liabilities by offering retirees and former employees the option to convert their monthly annuity into a cash lump-sum benefit and/or shifted the liabilities to insurers with purchasing group annuities, continued this year.
The appeal of de-risking is basic: By reducing the size of their benefit obligations, employers face less exposure to risks, mainly making higher required plan contributions when interest rates fall.
For example, spice manufacturer McCormick & Co. gave 3,300 former employees eligible for but not yet receiving retirement benefits the opportunity to convert their future annuities to a lump sum benefits. McCormick paid about $60 million to former employees who accepted the offer.
Later, SPX Corp., a Charlotte, N.C.-based manufacturer, took a two-step approach. It bought a group annuity from Massachusetts Mutual Life Insurance Co. to provide benefits to about 16,000 retirees.
In addition, it offered to about 7,500 former employees who are vested but not yet receiving benefits the opportunity to convert their future annuity into a cash lump-sum benefit. With the two actions, SPX expects to reduce its U.S. pension plan obligations by about $800 million.
Pension plan freezes limit employer costs
More than a decade ago, employers began to freeze their pension plans and that move continued in 2013.
Well-known companies such as Chrysler Group L.L.C., Goodyear Tire & Rubber Co., Macy's Inc. and numerous others this year either froze or announced their intent to freeze their pension plans.
Towers Watson & Co. research shows how widespread freezes have become.
As of June 30, only 30% of Fortune 100 companies still offered a defined benefit plan to new salaried employees. By contrast, in 1998, such plans were pervasive when 90% of the Fortune 100 offered DB plans to new salaried employees.
The reasons for the decline of defined benefit plans are several. They include employers' desire to reduce overall retirement costs, perceptions that workers prefer more portable plans and employers' belief that phasing out pension plans reduces financial risk.
Group health cost increases slow
In 2012, employers were ecstatic because, on average, their group health care plan costs, on average, rose 4.1%, a 15-year low. In 2013, the news got even better as costs, on average, inched up by an average of just 2.1%, according to Mercer L.L.C.
The most important reason for the easing of health care plan inflation is the increasing shift of employers to high-deductible, consumer-driven health care plans. The high-deductible feature, experts say, makes these plans much less expensive than more traditional health plans and also makes plan enrollees more careful consumers of health care services.
This year the cost of coverage via consumer-driven plans averaged $8,482 per employee, compared with $10,196 for preferred provider networks and $10,612 for health maintenance organization plans.
Greater flexibility for FSA contributions
In 2013, the Internal Revenue Service gave employers a new design alternative to reduce the likelihood employees will forfeit unused contributions to their flexible spending accounts.
That option, announced by the IRS at the end of October, will allow employees to carry over up to $500 in FSA contributions remaining at the end of a plan year to use the next plan year. That is an alternative to the modification of the 1984 IRS use-it-or-lose-it rule, which requires FSA participants to forfeit money remaining in their accounts at the end of a plan year. Under a 2005 modification, employers can establish grace-period FSAs that allow employees to roll over the entire unused account balance to pay for expenses incurred during the first two and a half months of the next plan year.
The appeal of the carry-over approach is obvious: Because employees will have much more time to spend unused contributions, wasteful end-of-year spending binges will be reduced. Still, employers are not likely to adopt the new approach until the IRS formally clarifies several issues, including the interaction of carry-over flexible spending accounts and contributions to health savings accounts.