How to Navigate State Retiree Insurance when turning 65

The Total Retiree Advantage Illinois (TRAIL) Program, a sub-program of the Illinois Department of Central Management Services (CMS) oversees the Medicare Advantage Open Enrollment for State of Illinois retirees and survivors. This open enrollment period occurs each fall.  For 2016 the open enrollment period is October 15- November 16, 2015. During this time all newly eligible retirees and survivors must enroll or opt out of coverage and all currently enrolled TRAIL members must update their coverage. The rules and options can be a bit confusing in the year you turn 65 and also enroll in Medicare, so to help you better understand the process we have highlighted a few important points:

1. You don’t switch health plans until the fall of the year you turn 65.  If you turn 65 after open enrollment for the upcoming year, you keep your plan for one additional year.  For example, if your birthday was December 1, 2015, you enroll in the state Medicare Advantage Plan during the 2017 open enrollment period in Fall 2016.  When you turn 65, you will enroll in Medicare.  Inform your current health plan that you have done so, so that Medicare becomes your primary provider.

2. For open enrollment after turning age 65, you will get a letter on yellow paper in the fall (mid-September) informing you that you need to enroll during the Fall Medicare open enrollment period. During that period, you will be required to switch out of your current health plan into one of the state Medicare Advantage Plans.

3. For those living in Champaign and surrounding counties, you have to choose between United Health Plan PPO Medicare Advantage Plan or the Coventry Advantra HMO Medicare Advantage Plan. It seems that most people choose the United Health Plan because it allows a choice of doctors at Carle and Christie, and provides coverage throughout the US. You will receive information on both plans and can research whether your doctors are included in each plan. Once enrolled in one of those Medicare Advantage plans, you may make changes during subsequent open enrollment periods in following years. You will receive updated information on plan options from the TRAIL system during that time. If you want to stay with your current provider, you do nothing.

4. The Delta Dental and EyeMed plans continue with the July 1st renewal date, so the benefit choice period for changing those plan remains the month of June.

5. Both available plans (when both spouses are in Medicare) are Medicare Advantage Plans which include Part D drug coverage. It is important NOT to enroll in a Medicare Part D drug plan through your pharmacy.  Doing so will kick you out of the Medicare Advantage plan through SURS. This has been a problem for some retirees as the pharmacies heavily promote enrolling in their Medicare Part D drug plans.

For more facts and figures you can view an informational slide presentation from TRAIL here, or visit the TRAIL website here.

Illinois Department of Central Management Services

Supreme Court Rules Illinois Pension Reforms Unconstitutional

The Illinois Supreme Court ruled today that Illinois State Pension Reform signed into law in 2013 is unconstitutional.  This ruling does not come as a surprise.  Previous rulings on healthcare indicated the court would interpret constitutional protection in favor of participants and strike the reform down. What does this mean to me?

Immediately, participants will not notice any major changes.  With court challenges to the original reforms, implementation of reforms had already halted in 2014.  This means none of the changes designed to reduce benefits or change contributions had been implemented.  This applies to both those who are active participants and retirees.

Longer term, it is still unclear what will happen.  Reforms were enacted to plug massive state budget deficits.  The fiscal situation of the state is still dire.  Current Governor, Bruce Rauner, has stated he intends to move forward with new reforms.  It is unclear exactly what these changes look like, but proposals have included:

• Shifting future pension costs to local governments and universities
• Changing the way in which future pension benefits accrue
• Moving from defined benefit type (pension) plans to defined contribution (401k style) plans

Since a majority of Bluestem's clients are current participants or retirees of the State University Retirement System (SURS) or other Illinois Pension Systems, we will continue to monitor this situation.  Planning during this time will continue to be a challenge as proposals will be a moving target until passed into law.  As always, contact us if you would like an individual review of your retirement plan.

Update on State Employee Retiree Health Insurance Premiums

The following is an update to previous postings regarding State of Illinois Pension Reform and Insurance for retirees. You can read those prior posts here. Following a court ruling that the State of Illinois wrongly withheld premiums for health insurance from retiree pension payments, members of the State’s five pension systems, including the State University Retirement System (SURS), are set to receive a refund. Refunds will be based on health insurance premiums paid from members’ pensions from July 1, 2013 through September 1, 2014. The premium refunds must be sent to members by June 14, 2015.

If you are affected, you should have received this State issued written notice informing you of options regarding the premium refund. The following is a summary of those options:

1. Do Nothing Members who do nothing will receive their full premium refund (and possibly interest) less their proportionate share of legal fees for the class action lawsuit, Kanerva v. Weems, whose settlement resulted in the premium refund.
2. Request to Opt-Out Members may notarize and submit an Opt-Out Notice. Members who opt-out would NOT be eligible to receive a refund of premiums as part of the class action settlement, their premium payments would be placed back in the Health Insurance Revolving Fund, and the member would be responsible for the legal expenses of any separate legal action. The Opt-Out Notice must be submitted by March 11, 2015.
3. Members who do NOT opt-out, may object to the Legal Fees Members may send a written objection to the legal fees that are deducted from their pension refund. Members who object to the legal fees can be heard by the Sangamon County Court on April 1, 2015. Any objection must be submitted by March 11, 2015.

The amount of legal fees to be subtracted from members’ refunds remains undetermined. The State Universities Annuitants’ Association’s (SUAA) attorneys and others are pushing to base the legal fees on the number of attorney hours worked and a reasonable hourly rate, rather than on a flat percentage of the total settlement.

The Sangamon County Court ordered that the SUAA establish a website to provide information about the health insurance premium refund. The website contains a number of court orders and documents related to Kanerva v. Weems. You can access this website here.

Other Pension Updates At this time, implementation of the pension reform bill passed in 2013 is still pending the outcome of legal challenges to its constitutionality. Oral arguments are expected to begin in March 2015. In his recent budget address, Governor Bruce Rauner proposed new reforms as part of his effort to close the State’s budget gap. At this point, proposals are very preliminary. We believe any legislative action on such proposals is unlikely until a ruling by the Illinois’ Supreme Court on the legislation passed in 2013.

Update on Illinois Pension Reform

For updated information on this subject please read our latest blog post. This year has seen a flurry of lawsuits related to Illinois Pension Reform, including previous changes made to the State Retiree Health Insurance.  Many of the cases are still in process, but here is an update on what we know:

Pension Reform

In late 2013, Illinois General Assembly passed a bill aimed at reforming the pension systems for most Illinois public employees and Governor Pat Quinn signed the bill into law.  This bill reduced future benefit increases for current retirees and decreased expected benefits for those not yet retired.  Lawsuits quickly followed questioning the constitutionality of this law.  The law was slated to go into effect as of June 1, 2014, but was suspended pending resolution of these lawsuits.  This means that SURS and other State Retirement Systems are operating under the rules as they existed before pension reform was passed.

You can see my summary of the pension reform in two prior blog posts from December 6th and December 23rd.  You can also view a SURS press release regarding the halting of pension reform here.

Health Insurance

Before the pension reform discussed above, changes were made in 2012 requiring State Retirees to contribute towards the cost of their health insurance by a  2% deduction from their pension (1% for retirees enrolled in Medicare).  Like pension reform, lawsuits were filed challenging this law.  The opinion of many experts at the time of passage was that Retiree Health insurance was a separate benefit from pension benefits and therefore not constitutionally guaranteed.  This was further backed by an initial court ruling.  Since that time, there has been more action by the courts.

First, the Illinois Supreme Court overturned the lower court's decision by ruling that Retiree Health insurance is in fact protected by the same constitutional provisions that protect pensions.  Then, shortly after, another ruling halted the July 2014 planned increase in premium contributions to be made by pensioners.  Finally, a ruling this week determined that the state may no longer deduct health insurance premiums from retirees' pensions.

You can read more about this change here.

Implications

It is still too early to make substantial planning decisions.  Immediately, retirees can expect their pension benefit to increase in the next month or two as health care deductions are halted.  It is also possible that previously deducted premiums will be refunded.  For retirees who previously deducted premiums paid as an Medical Expenses under their Itemized Deductions on their tax returns, they may have to claim refunds as income.

Additionally, some retirees opted out of state insurance in favor of alternative Medicare Supplemental, Medicare Advantage or other policies.  This might sway those retirees to return to the state plan during open enrollment for 2015.

Longer term the State's position on pension reform looks more weak, but this is a complex legal matter.  I expect we are a long way from any final resolution.

Further Clarification on Illinois Pension Reform

Updated information on this subject can be found in our latest blog post. This post follows up my initial posting about Illinois Pension reform and specifically how it impacts State University Retirement System (SURS) members.  You can read my original post here.

Notwithstanding the likely legal challenges of pension reform, many items are subject to interpretation in the new law.  It is likely additional legislative guidance will be needed to fully understand the impact of these reforms.  This post is based on information from a knowledgeable representative of SURS, but may change in the future.

Pensionable Earnings Limits

See the original post for complete details on this change.  A question that arose is, if your income currently exceeds the limit, how would your future contributions be affected?

SURS interpretation is that your contributions will be based on pensionable earnings.  Similar those who contribute to social security, no SURS contributions will be required on salary exceeding the limit.  If your salary is grandfathered in, contributions are up to your grandfathered salary.  No future pay increases exceeding the limit will increase your grandfathered limit or contributions.

For example, your salary in 2013 is $150,000.  The pensionable earnings limit is $110,631.26.  You receive a pay increase to $160,000.  Your pensionable limit remains at $150,000 and contributions are based on salary up to that limit.

Future raises will not increase your grandfathered limit, which is equal to the participant’s annualized rate of earnings as of June 1, 2014.

Money Purchase Changes

This was not mentioned in my last posting, but changes are also being made to the Money Purchase Formula, which is one of three options for calculating your defined benefit pension.  The annuity under this method is calculated by a cash value (determined from contributions made by the employee, employer, plus an effective interest rate determined annually).  If used, this system determines the annuity from cash value using an actuarial table.  The larger the cash value, the larger the annuity (up to limits).  The effective interest rate of that cash value going forward will be the 30-year US Treasury bond rate plus 75 basis points (0.75%).  Estimating the current 30-year US Treasury bond rate at 3.85%, the current Effective Interest Rate would be equal to 4.6%.  Compare this to the effective interest rate 7/1/12 through 6/30/13 of 7.5%.  As the interest rate is decreased, the potential cash value will grow more slowly therefore slowing the potential growth of the annuity.

This will also affect purchasing of service credit and the refund for those in the Portable system.

You should also note, the actuarial assumptions used in determining the annuity tables may now be revised annually.  If experienced lifespans are increased or earnings are decreased, annuities calculated under this system would also decrease.

Pension Reform for SURS Participants

This past week, the Illinois General Assembly passed a bill aimed at reforming the pension systems for most Illinois public employees and Governor Pat Quinn has signed the bill into law.  It is likely too early to begin a full assessment of what these changes mean for participants, including those in the State University Retirement System (SURS).  Time will be needed to fully review, interpret and digest the implications of the entire 327 page bill.  Additionally, lawsuits to contest the constitutionality of this bill are expected and will take time to resolve. At this point, we know very little.  The following is an attempt to summarize key provisions and begin thinking about planning to be done in the future.  As so much is unknown, it is likely too early to begin making decisions regarding your employment or retirement prospects.  This includes trying to contact SURS for an assessment of your individual situation.  Below are some of the key provisions with some of my own planning commentary in red:

Note: 

• A Tier 1 participant is an employee or retiree who began SURS participation before January 1, 2011.  A Tier 2 participant is an employee who began SURS participation on or after January 1, 2011.
• This content mostly applies to all pensions, written specifically to those in the SURS system.  A colleague, Dave Grant of Finance for Teachers, has a more thorough blog post specific to the Illinois Teachers' Retirement System (TRS).  You can read his post here.

Automatic Annual Increases:

Beginning in 2015, annual increases for Tier 1 participants will be 3%, compounded annually, but will only apply to the lesser of the annuity or a multiplier equal to $1,000 times number of years of service.  The multiplier will be adjusted annually by inflation (CPI-u).  Since the cost of living adjustment (COLA) was added to the SURS pension in 1989 and has become a large portion of the pension liability, this was a likely target of reform.  In past conversations Karen and I have had with a knowledgeable SURS official, it was this official's opinion this COLA Adjustment was not constitutionally guaranteed.  Soon to be filed court cases will be the final judge.

Retirement Age:

For those under the age of 46 (as of June 1, 2014), retirement eligibility will be delayed.  The younger you are, the longer the delay.

Earnings Limits:

Tier 1 participants will be subject to the same pensionable earnings limits that Tier 2 participants are already subject to (currently about $110,000, adjusted annually).  Participants exceeding this limit at the time of enactment will be grandfathered in at their earnings rate on June 1, 2014.  It appears if your salary is currently over this $110,000 limit, future pay increases will not increase your pensionable earnings except to the extent the pensionable limit exceeds your income.  However, number of years in the SURS system will still affect your final pension.  This is a big loss for higher income earners or those who expect higher income in the future.

Employee Contribution Decrease:

Tier 1 participants will have their contribution decreased by 1%.  This appears to be a point of negotiation in exchange for other losses of benefits.  This will likely be a point of consideration for the courts to judge if this is adequate consideration for lost benefits.  At a minimum, anyone affected may consider contributing that 1% decreased contribution to an alternate retirement savings vehicle such as their 403b or Deferred Compensation Plan.  

Defined Contribution Plan:

Tier 1 participants will have the option of electing into a defined contribution type plan by July 1, 2015.  This will be limited to 5% of participants.  A lot more details are to be worked out here, though it will likely look similar to the SURS Self Managed Plan (401a).  This may be enticing to younger, higher income participants.    

Unused Sick/Vacation Time:

For new hires after June 1, 2014, unused sick and vacation time will no longer be applied towards service credit or enhancing pensionable earnings.

For more details on these changes, see the full bill (SB1 - Click Here) or a summary of changes by SURS (SURS Summary of Senate Bill 1).

Note: It appears many of these changes are not slated to affect participants in the self-managed plan or Tier 2 participants.

The Takeaway:

This is a very contentious issue with various interested parties and real impacts on many people.  It will take a lot of time before all these issues are sorted out.  As more is known, we will be addressing the individual impact with each of our affected clients.  For those who are not our clients, I acknowledge that planning in uncertainty is difficult and stressful.  My best advice is focus on what you can control and build some cushion into your savings plan to deal with the uncertainty.  Contact us if you want the peace of mind of having an experienced Advisor on your side helping to plan for events such as this.

Insurance changes for Illinois State Retiree Health Insurance

The following is information regarding recent changes to Illinois State Retiree Health Insurance. These changes only apply to those who are enrolled in Medicare.  If you are affected by this change, you should be receiving a letter from CMS regarding the proposed changes to the SURS health insurance plan this week.  Note: if you are covering a dependent, you must both be enrolled in Medicare for this change to affect you.  If only one of you is enrolled in Medicare, then you will keep your existing coverage and May benefit choice period. Here is a summary of what we know:

Important! You must make a decision and enroll (postmarked) by December 13, 2013.  There is no default choice.  If you do not enroll, you will only have Medicare Parts A and B coverage which is very limited and does not include prescription drug coverage.    New state coverage will start February 1^st and run through December 31^st of 2014.    In future years, your open enrollment period for health insurance will be the same as the Medicare Fall enrollment period.  You will note this has changed from May, as in past years, to fall enrollment for this year and future years.  This is also the time to add or drop dependents, add, drop or change Optional life insurance coverage, and add or drop dental coverage.  

Coverage Summary

Every county in the state has different choices of plan.  Consult the map in the materials you receive, or follow this link and view page 8

In Champaign County, you have two choices of plans: UnitedHealthcare (UHC) PPO and Coventry Advantra HMO.

With the UHC plan, you can see any willing provider as long as the provider is in the Medicare program.  You should note there is no difference for in-network and out-of-network coverage levels, as with most PPO plans.  After a $100 deductible, you pay 10% of charges for services up to the $1,300 annual out-of-pocket maximum, then the plan covers 100%.

With the Coventry Advantra HMO plan, you must choose a primary care physician from within their network of providers, and use only in-network providers except for emergency care.  There are copays, and the annual out-of-pocket maximum is $3000.  There is a chart on page 11 of the Trail booklet comparing the costs for the two plans.

All SURS annuitants who are enrolled in Medicare Parts A&B (and SURS annuitants with Medicare enrolled dependents) will be required to enroll in a Medicare Advantage plan if they want to be covered by the SURS health insurance.  These plans include prescription drug coverage (MA-PD plans; MA equals Medicare Advantage, including Part A and Part B coverage; PD equals Prescription Drug), so you do NOT have to enroll in a Medicare Part D plan.

Caution! Be careful when enrolling as you may also be receiving mailed offers from private Medigap insurance companies.  These options do not qualify for State coverage.  To enroll in the state plan, your forms must have the “Total Retiree Advantage Illinois” logo (Your TRAIL to Better Health).  Here is the logo:

Vision, dental and life insurance benefit plans are not changing, but you must enroll in one of the State-sponsored plans to continue access to existing vision coverage.  Life insurance and dental, if elected, continue automatically.

Carle Patients: It appears that if you want to stay with Carle doctors, you need to choose the UnitedHealthcare PPO.

The Coventry Advantra website will be available on November 1^st.  At that time, you can look there for their providers in Champaign County.

Other Notes:

For community college retirees, you are in the College Insurance Program (CIP); if your SURS is from a State University or State of Illinois Department, you are in the State Insurance Program.  This is important, because prices are different for each program.

You could opt-out of state coverage and shop for an individual Medigap or Medicare Advantage coverage policy.  You would lose any subsidy from SURS state coverage if you make this election.  This could make sense if (1) premiums on a private policy are smaller than your 2014 2% of pension contribution (those with large pensions) or (2) you would rather pay a higher premium and continue on a Health Alliance Medicare plan.

If you are in the State Insurance program and you opt-out, you would have the option to enroll in the State-sponsored plan during the next open enrollment with coverage beginning January 2015.

If you are in the College Insurance program (CIP), opt-out provisions are different; you would want to verify them with CMS.

Complete information for: CIP – The Trail

Complete information for: State Insurance – The Trail

As always, please contact us if you have any questions or would like clarification.  

Detroit and Public Pensions - Kiplingers

This past month, I spoke with Anne Kates Smith of Kiplinger Magazine on how those in public pensions should react to the the ongoing news regarding the Bankruptcy of the City of Detroit.  She posed the question, what should pension participants expect? Before addressing this concern, I would first start by cautioning everyone to put the Detroit crisis in perspective.  Municipal and Government bankruptcies are rare, and though they do happen from time to time, focusing on the outlier makes us believe this is more common than it really is.  This is a common mental bias we should be aware of.  This is why I always remind clients, focus most of your energy on what you can control because it will have the biggest impact on your future.

Given there is some risk, how should you respond?  I answered:

"Relying solely on your employer is never a good move," [...]

If you can contribute to a supplemental savings plan, such as a 403(b) or 457(b), do so. [...] If you're not offered a savings plan outside a traditional pension, set up your own individual retirement account—even if you don't qualify for tax-deductible contributions. Kuebler tells clients to aim for savings equal to 15% of income, which means that if the state requires you to contribute, say, 8% toward a pension, you should sock away another 7% elsewhere.

Your actual rate of savings may vary based on your own goals and resources, but each employee needs to take some responsibility towards their own retirement.  The State University Retirement System (SURS) for Illinois University Employees and the Teachers' Retirement System (TRS) for public school teachers are a great component of a retirement plan, but needs to be integrated with outside sources of retirement funding as well.

Be sure to check out the complete article in the October issue of Kiplinger or online.