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Publications | September 29, 2015
3 minute read

Employing Retirees Part 2: Take Steps to Avoid Problems with Health & Welfare Plans

Employers often turn to recent retirees when there are specific employment needs that require quick onboarding and a skillset that may be difficult to find in the local market. As Mary Jo Larson previously reported in the Summer 2015 issue of the HR Focus newsletter, re-hiring former retirees can be problematic under an employer’s retirement plans. It is also important to consider the potential administrative complexities that rehiring retirees can have on health and welfare plans.

The Patient Protection and Affordable Care Act (Health Care Reform) has a number of stringent requirements, such as limits on lifetime or annual maximums, first dollar preventive care reimbursement, pre-existing condition limitations, plan claims and appeals, etc. However, none of those requirements apply to retiree-only plans. A “retiree-only” plan is any group health plan with fewer than two participants who are current employees. Employers should be extremely cautious when rehiring retirees to avoid running afoul of this extremely limited exception under the statute for retiree-only plans.

Many employers carve out independent contractors from eligibility under health and welfare plans. However, a rehired retiree often fails to be a true independent contractor under IRS rules, leaving the employer potentially vulnerable to a claim that they were wrongfully excluded from coverage. In a medical plan, that type of claim can result in an employer having to retroactively pay for any medical claims that arose during the time that the individual should have been eligible under the terms of the Plan. And those claims that an employer’s insurance company or stop-loss carrier will refuse to pay are left to the employer to pay.

We recommend that you take these five additional steps in determining whether to rehire retirees:

  1. Ensure retiree benefits are immediately suspended upon rehire to avoid jeopardizing the retiree plan’s exclusion from Health Care Reform.  If former retirees are allowed to continue participating in the retiree plan upon rehire, the plan will lose its exemption not just for those individuals, but for every individual covered under the plan
  2. Coordinate plan eligibility to prevent double dipping. You should draft your welfare plans to prevent a claim being simultaneously paid under both the active and retiree medical benefit programs.
  3. Review retiree medical and retirement plan eligibility. Under the terms of some plans, to enroll in active benefits a former employee must also suspend his or her retirement plan income. Also review the impact that a temporary employment may have on future retiree medical plan eligibility and potential benefits, such as employer subsidies.
  4. Review cafeteria plan eligibility provisions. Most plans are structured so that if an individual is rehired within 30 days of the initial termination of employment, welfare benefit enrollment is limited to previous plans and coverage. If an individual is rehired following a longer break in service, his or her enrollment is treated as a newly eligible employee – which means any applicable waiting period applies. However, some plans are written with different terms, so you will need to carefully review your own plan document.
  5. Evaluate plan coordination with Medicare. If a former employee returns to work,  the Medicare Secondary Payer Rules mandate that if the services performed by the rehired retiree are sufficient to qualify that individual for benefits as an employee, Medicare no longer pays as the individual’s primary insurance. This means that the rehired employee will have to either suspend retiree medical insurance and enroll in active coverage or waive all employer-sponsored coverage and have Medicare only. If the former employee was receiving Medicare Part B subsidies, those will also need to cease.

The attorneys in the Warner Employee Benefits/Executive Compensation Practice Group can help you properly handle the hiring of retirees.