Will the Inflation Reduction Act Impact Group Retiree Benefits for Plan Sponsors?

Featured in BenefitsPRO on June 9, 2023

The Inflation Reduction Act of 2022 was signed into law last August, establishing a diverse package of health, tax, and climate change provisions – including several provisions to lower prescription drug costs for Medicare patients and reduce federal drug spending. Implemented in phases, the first was designed to accomplish three things: capping out-of-pocket insulin prices at $35 a month, requiring rebates from drug companies if drug prices rise faster than inflation, and reducing adult vaccine costs while expanding coverage for them.

The Inflation Reduction Act mandates that participating plan sponsors must attest that the actuarial value of prescription drug coverage for qualifying covered retirees, Part D eligible individuals who are not enrolled in a prescription drug plan or a Medicare Advantage prescription drug (MAPD) plan, is at least equal to the actuarial value of Part D standard prescription drug coverage.

Employers Reassessing Whether to Sponsor Retiree Health Plans

These changes ushered in by the new law have prompted some employers to reassess whether they should continue to offer retiree health benefits and, if so, in what format. Additionally, several policy proposals currently under consideration could profoundly impact retirees’ health costs and benefits. This is especially significant given the current state of other post-employment benefits (OPEB) liabilities, which are severely under- or un-funded.

OPEB encompasses items such as health insurance, life insurance, Medicare supplemental insurance, and other types of benefits not categorized as a pension. Currently, states owe $1.2 trillion in unfunded OPEB liabilities to retired public employees. That debt is poised to escalate absent any meaningful reform, such as targeted efforts by states to pre-fund or reduce these liabilities.

Though the act has resulted in several uncertainties – such as employers questioning coverage offerings and OPEB deficits that could widen – it also protects and benefits retirees in several ways. Thanks to Medicare’s ability to negotiate prices with drug manufacturers, beneficiaries’ prescription prices will decrease, and a yearly cap will limit out-of-pocket drug costs to $2,000 beginning in 2025. Plan members will also have the option to pay their prescription costs in monthly amounts spread over the year rather than all at once.

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