Defined Benefit vs. Defined Contribution Retiree Benefits
| Approach | How It Works | Employer Cost | Retiree Risk |
|---|---|---|---|
| Defined benefit | Employer provides specific coverage; absorbs cost increases | Unlimited; grows with healthcare inflation | Low; employer absorbs cost increases |
| Defined contribution | Employer provides fixed dollar amount; retiree chooses coverage | Fixed; grows only if employer chooses to increase it | Higher; retiree absorbs cost increases above the fixed amount |
Retiree HRAs
A Retiree HRA is a defined contribution retiree benefits approach in which the employer provides retirees with a fixed dollar amount in an HRA to purchase individual Medicare supplement or Medicare Advantage coverage. The retiree chooses their own coverage from the individual market; the employer reimburses premiums up to the HRA amount.
Transitioning to Defined Contribution
Watch Out
Transitioning from defined benefit to defined contribution retiree benefits is a significant change that requires careful communication and legal review. Retirees who have been promised specific benefits may have vested rights that cannot be unilaterally reduced. Work with ERISA counsel before making any changes to retiree benefits.