ARMONK, N.Y.-IBM Corp.'s cutting-edge retiree health plan could be a model for other employers seeking to raise employee appreciation of post-employment benefits while also limiting their financial exposure.

The new plan will replace an existing retiree health care plan, but it will not apply to current retirees and employees within five years of eligibility for retirement. Under the current program, IBM since 1991 has capped its contribution to retiree health care premiums at $7,000 a year for retired workers under 65 and $3,000 a year for retirees 65 or older.

By contrast, the new plan, which IBM worked closely with benefit consultant Towers Perrin in designing, will incorporate an account balance feature for retirees, much like a cash balance pension plan, which the company also is putting in place (BI, May 10).

The intent of the new plan was not to further restrain costs but to increase employee understanding and appreciation-through the account balance feature-of IBM's retiree health care benefits program.

"Like cash balance, these are very visible benefits," said Don Sauvigne, IBM's program director of capital accumulation plans, referring to the plan's structure.

Specifically, once an employee reaches age 40 and has at least one year of service, IBM establishes a tax-free "Future Health Account" for the employee. Each year, IBM will credit the employee's account with $2,500. Those credits will continue for 10 years or until the employee leaves Armonk, N.Y.-based International Business Machines Corp., whichever comes first.

Interest is credited to the accounts monthly, and the rate is indexed to the average return on one-year Treasury bills plus 1%. For 1999, the annual interest rate is 5.5%. Accounts continue to accrue interest even after the annual $2,500 credits cease.

Employees can tap the accounts if they leave IBM once they reach age 55 and have completed 15 years of service. In addition, current employees who are at least 40 can, when they retire, begin using their account balance after 30 years of service, regardless of age. Employees who leave before meeting those age and service requirements forfeit their account balances.

Retirees can choose from a range of health care plans IBM offers and draw on their accounts to pay the premium charged by the plan they select. Retirees decide each year how much of the IBM health premium they want to pay from their account and how much they will pay out of personal funds.

Retirees can use their accounts only to pay IBM health insurance premiums for themselves and eligible dependents. Account balances cannot be taken in cash or used to pay for non-IBM provided coverage, such as Medicare Part B premiums.

If a retiree dies, though, the account balance could be transferred to the surviving spouse, domestic partner or other eligible dependent, who could continue to use it to pay premiums charged by health plans IBM offers.

If an account balance plan is depleted, retirees still can purchase IBM health care coverage at group rates. In addition, employees who leave IBM without earning a right to the Future Health Account can purchase IBM coverage at group rates if they meet the "rule of 65." Under that rule, a retiree must be age 55 or older with at least five years of service, and his or her age and years of service must total at least 65.

IBM's new plan is a dramatic departure from traditional retiree health care plans that many of the nation's largest corporations once offered. Under those traditional plans, employers essentially provided early retirees with coverage that matched what they provided active employees. Plans provided to retirees age 65 and older picked up costs, such as prescription drugs, that the federal Medicare program did not.

But such plans have dwindled as companies have become increasingly aware of the their inability to afford them.

The result has been a wave of retiree health care plan terminations and a cutback in the generosity of coverage offered by remaining plans.

For example, as recently as 1993, 46% of employers with more than 500 employees offered a health care plan to early retirees, while 40% offered coverage to retirees 65 and older. By last year, just 36% of employers offered coverage to early retirees, and 30% provided a plan to Medicare-eligible retirees, according to a William M. Mercer Inc. survey.

"Companies can't afford what they used to provide. Many are looking for alternative ways to provide coverage," said Marsha Mandel, a principal with Buck Consultants Inc. in Secaucus, N.J.

IBM, unlike many of its competitors, says it is committed to offering health care coverage to retired workers. And back in 1991, by placing dollar caps on the amount of retirees' health care premiums it would pay, IBM already had limited its exposure to retiree health care costs.

At the same time, Mr. Sauvigne said, because employees always will know how much is in their accounts, they will have a better understanding of what they need to save to pay future premiums.

IBM drove that point home in announcing the new plan to employees: "With the new Future Health Account, you will see just how much you can expect IBM to pay toward your post-career health care coverage so that you can save for your share of future costs," said the company in a brochure describing the plan.

Benefit experts generally applaud the plan design.

"This is an application of sound cash balance principles to retiree health care coverage," said Stephen Parahus, a vp with The Segal Co. in New York.

"I really like its fundamental architecture. From the employer perspective, there is a well-defined subsidy level. From the employee perspective, I like the fact that an account balance is something easy to understand. There is something very attractive and appealing about it, and more companies are likely to follow IBM's path," Mr. Parahus added.

Nancy Ross, a partner with the law firm of McDermott, Will & Emery in Chicago, describes the IBM plan as a smart and a novel idea and one that strikes a middle ground between the extremes of offering costly traditional retiree health plans and terminating those plans.

"Some employers want to continue to provide retiree health care coverage, but not as in the old paternalistic days. The new approach is to provide coverage but limit exposure. That is key in this day and age," Ms. Ross said.

By offering the new plan, IBM is giving employees a message that it is staying in the retiree health care business, says Tom Beauregard, a consultant with Hewitt Associates L.L.C. in Rowayton, Conn.

"Contrast that with many other employers who say they can't afford coverage. From IBM's standpoint, that is a very positive message," Mr. Beauregard said.

Others note that IBM also is giving employees an incentive to remain with the company longer. That is because account balances will be much higher and the balance depleted much more slowly for an employee who retires at, for example, 65, rather than 55.

Take the case of a new employee who joins IBM at age 40 and retires at age 65 and at that point pays half of retiree health care plan premiums out of his IBM account and half out of personal savings. The account balance, in such a case, could last 25 years, or well beyond the individual's life expectancy, Mr. Parahus said. By contrast, if that same individual retired at age 55, his account balance could be depleted in roughly seven or eight years, he said.

"Even a prudent person retiring at a young age could exhaust the account," Mr. Parahus said.

Because the age at which an employee retirees will have such a significant impact on how long the account balance will last, a good communications program is vital, Ms. Mandel said. IBM has taken several steps to communicate the new program to employees, including a brochure, an e-mail announcement, an 800 number, and a personalized statement.

"Employees need to be told that only a certain percentage of retiree health care premiums could be covered," she said.