IBM's "FHA" or, How you've been ripped off

The following research comparing the previous retiree health account to the "Future Health Account" (FHA) has been developed by CWA's Benefits Research Department. (Note: even if you have a pension choice, if you are under 50 years of age or not within 5 years of retirement, you are stuck with the FHA).

Summary and Introduction

Effective July 1, 1999, IBM instituted a new retiree health plan. The company unilaterally replaced the comprehensive insurance plan with a new, defined contribution plan. IBM calls the new plan Future Health Accounts, or FHAs. The concept of the new health plan is similar in design to the cash balance accounts IBM imposed to replace the pension plan.

The change means that the value of the company-provided retiree health benefit is no longer linked to the actual cost of health care. Instead, a retiree's access to health care is dependent upon whether the interest rate earned by the FHA exceeds the rate at which the cost of the health plan grows.

With the change, IBM reneges on its promise to provide career employees a specific benefit package that will assure a measure of income and health security during their retirement. Instead, the company promises only to make a limited contribution toward the purchase of retiree health benefits. The contributions will be made only during a specific 10-year period of an employee's career (beginning at age 40). If, upon leaving IBM, the retiree meets the FHA eligibility requirements, he or she may access the "account", but only for the purpose of purchasing health insurance sponsored by IBM.

Workers who are within 5 years of retirement eligibility will continue to be covered under the terms of the old plan, but all other workers will be vulnerable to the rising cost of health care in their retirement years, when their incomes are most vulnerable. The examples below illustrate that no retiree who is not covered under the old plan will retain the financial protections they once were promised. Simply put, the Future Health Accounts do not grow as fast as the cost of health care rises.

An employee retires in the year 2009 at the age of 57 with 34 years of service. By the age of 62 his Future Health Account is depleted. (See Example #1)

An employee retires in the year 2016 after 22 years of service at the age of 55. By the time she is 57 years old, her Future Health Account does not have sufficient funds to pay for her health insurance coverage. (See Example #4)

An employee retirees at the age of 65 with 32 years of service in the year 2026. Seven years into retirement there are not enough funds left in her account to pay for health benefits. (See Example #5)

Each of these individuals would have been entitled to at least some health care protections from IBM under the old retiree health plan. That plan obligated IBM to contribute up to $7,000 a year toward coverage for retirees younger than age 65 and up to $3,000 a year toward coverage for retirees age 65 and older. If coverage cost more, retirees would have to pay the extra cost. Nevertheless, they would have had access to some coverage.

The health security of IBM retirees is further jeopardized because there is no trust fund or other asset earmarked to provide the retiree health benefits. IBM will simply submit the required contributions toward the Future Health Accounts out of operating funds when benefits become payable. However, there is no guarantee that the benefits will be available when the retirees need them. IBM has explicitly reserved the right to terminate the plan at its own discretion. Moreover, there is no law requiring employers to provide retiree health insurance.

How Does IBM Get Away with Ripping Off Retirees?

The changes to the IBM retiree health plan were imposed by the company without input from or consultation with the employees. IBM is not required to consult with employees over the terms and conditions of employment when there is no union present. With a union, IBM would be prohibited from changing any benefits that affect the terms and conditions of work of active employees without meeting with the union and bargaining over such changes. Although unions are not legally authorized bargaining representatives of retired employees, retiree health benefits are considered "bargain-able" items because they are benefits which will affect active employees, though at some time in the future.

This report summarizes the old IBM retiree health plan, outlines the provisions of the new Future Health Accounts, and presents some examples of the impact of the new accounts on IBM retirees. It concludes by offering some alternative provisions that would serve as a safety net, securing retiree health benefits.

The Old IBM Retiree Health Plan Promised a Package of Benefits

The old IBM retiree health plan provided two benefit options from which retirees could choose. Under Option A, once the retiree paid an annual deductible equal to 3/10 of 1 percent of the annual pension, the plan would begin to reimburse for covered benefits. For example, a retiree with a pension of $2,500 per month would pay an annual deductible of $90 ($2,500 X 12 months X .003). The plan reimbursed 80% of covered charges and the retiree would pay the remaining 20%. Part-timers who retired before January 1, 1997, paid 40% of covered charges while the plan paid 60%. The amount of plan benefits were limited to $250,000 per lifetime (non-renewable) to cover the retired employee and all family members for major medical, mental health, and substance abuse benefits, including benefits received as an active employee.

Option B provided the same benefit reimbursement levels as Option A, but the deductible was $250 per person per year, with a maximum for families of $750. The total non-renewable lifetime benefit was $1,000,000 for major medical, surgical, hospitalization, and mental health and substance abuse benefits.

IBM Limited Its Contribution to Retiree Health Benefits Under the Old Plan

Under the terms of the old plan, retiree health benefits were subject to annual maximums, or caps, on the amount IBM would contribute toward the retiree health benefits. The amount of the contribution cap depended on the age of the retiree and the year he or she retired, as follows (according to the November 6, 1998, benefits book):

Pre-1992 retirement
under age 65 $7,500
age 65 or older $3,500
Post-1991 retirement
under age 65 $7,000
age 65 or older $3,000

If the cost of the health plan exceeded the caps, then IBM could have taken one of two courses of action: cut benefit levels to reduce the cost or impose or increase premium sharing so that retirees pay more toward the cost of coverage.

The combination of defined benefits with the contribution limit created a balanced approach to health benefits. For retirees, the old IBM plan provided a reliable benefits package. That is to say, even though the cost of health care rose, they could rely on the fact that at least some form of health benefit would be in place. At the same time, the company was able to limit its liability for the cost of the retiree health coverage, a key goal for many employers.

IBM's Cash Balance Health Care Accounts Shift Promise from Benefits to Contributions

IBM's new retiree health plan, which became effective July 1, 1999, establishes so-called "Future Health Accounts," or FHAs, for each employee who is age 40 or older who has at least one year of service. FHAs do not apply to employees who retired prior to July 1, 1999. Employees who are within 5 years of their earliest retirement eligibility under the retirement plan in effect on June 30, 1999, are eligible to continue participating in the "Grandfathered Retiree Health Plan."

While IBM will continue to offer a plan of benefits, the level of benefits is no longer defined. Instead, the company promises to set up an "account" for each employee who meets the eligibility requirements and to make contributions to the accounts. The accounts are then used by the retiree to purchase health benefits. There is no guarantee that the accounts will provide sufficient funds to provide adequate coverage for any particular period of time. Thus, the FHAs are similar in design to the Cash Balance Accounts (CBA) IBM set up to replace the pension plan. The CBA guarantees a contribution, not a benefit.

For each employee who is at least age 40 and has one or more years of service, the company will make contributions of up to $2,500 per employee per year (pro-rated for less than full-time hours) for a period of 10 years, or until the employee leaves IBM, whichever comes first. As a general rule, then, the maximum contribution the company will make toward retiree health coverage over an employee's career is $25,000.

In addition, for employees age 40 or older with at least one year of service on July 1, 1999, when the plan became effective, IBM will "seed" the account with a contribution amount based on current age and years of service. Employees who attain age 40 after July 1, 1999 do not receive the seed amount.

Company contributions to the FHAs are further enriched by interest earnings. The annual effective interest rate cited by IBM in its Summary Plan Description (SPD) is the average return on one-year U.S. Treasury bills, plus 1%. Interest is added to the account at the end of each month. Interest continues to accumulate after the 10-year contribution period has ended and as long as a balance remains in the account.

IBM's New Retiree Health Plan Will Not Protect Retirees Throughout Their Retirement

When the rising cost of health care is factored against the company contributions and interest accruals, the value of the FHAs as a vehicle for assuring retirees access to health coverage during their retirement is shown to be inadequate. A recent survey of 213 large Fortune 1000 companies conducted by Towers Perrin, a noted employee benefits firm, found that employers expect health plan costs to rise between 8 percent and 10 percent in the year 2000, a greater increase than experienced in 1999.1 While it is unlikely that this extreme cost escalation will go unchecked, it is certain that costs will rise. The examples used by IBM in its benefit booklet describing the Future Health Accounts do not calculate the impact of rising health costs on the balance of the FHAs. When those calculations are conducted, it is evident that the FHAs will not provide the security essential to a good benefits plan. The examples below illustrate that fact.

While IBM included a provision to "grandfather" employees who are within five years of retirement eligibility on June 30, 1999, all other employees are hit hard. Unfortunately, those workers who just miss the cut-off date for the grandfathering threshold will see the value of their retiree health benefits seriously eroded, as shown in the first two examples. The other examples are modeled after cases presented in IBM's Summary Plan Description for the retiree Future Health Accounts.2

George is age 47 at the time the Future Health Accounts are implemented and has been with IBM for 24 years. He is six years shy of the "30-and-out" eligibility provision for a full pension, and thus one year shy of eligibility for the Grandfathered Retiree Health Plan. However, he is eligible for the opening account balance seed, and IBM contributes $12,915 to George's account. After ten years, George leaves the company at the age of 57 with 34 years of service. The balance in his FHA totals $60,325. He purchases health coverage for himself and his daughter under the IBM Network Select plan, but, by the age of 62, six years after retirement, his FHA account is depleted. In spite of annual interest accrual, the cost of health care quickly eats into the balance of George's Future Health Account. Under the old plan, George would have been eligible to receive contributions of up to $7,000 from IBM for retiree health coverage. When George reached age 65, IBM's contribution would have been reduced to account for coverage provided through Medicare.

Patrick is age 50 with nine years of service when the Future Health Accounts are introduced. He is not within five years of retirement eligibility, therefore he does not qualify for grandfathering under the old IBM retiree health plan. However, Patrick does qualify for an opening account balance seed of $21,330 from IBM. Patrick stays with the company until the year 2006, having completed 15 years of service by the time he reaches age 57. Under the provisions of the old retiree health plan, Patrick's age and service would have qualified him for an early retirement pension and health benefits. Under the Future Health Accounts (FHA), Patrick has access to an account with a balance of $55,523 upon his retirement and interest continues to be credited to his account as long as there is a balance. Patrick elects to purchase coverage for himself and his wife under an IBM HMO which costs $8,039 annually at the time of his retirement. But the cost of the health plan continues to rise during his retirement and by the age of 63, seven years into Patrick's retirement, there are insufficient funds in the Future Health Account to pay the annual premium. Under the terms of the old IBM retiree health plan, Patrick would have been entitled to a contribution from the company that would to cover a part of the cost of his health insurance.

Louise is 46 years old with 4 years and 9 months of service when the new IBM retiree health plan is implemented. Under the terms of the new plan she accrues an FHA balance of $77,727 by the year 2014, when she decides to retire. Her account balance is aided in large part by the initial $8,431 seed deposit made by the company in 1999 because she was age 40 when the FHA went into effect. She is age 62 when she leaves the company. Louise elects to purchase retiree plus one coverage through an IBM HMO. Because of health care inflation, the cost of retiree health insurance coverage under the HMO has grown to $14,779 per year, even though the HMO is the least expensive plan offered by IBM. Louise experiences some premium relief when she turns age 65, because her premiums are reduced to account for coverage provided under the Medicare plan. Nevertheless, by the time she turns age 71, about 10 years into her retirement, her health insurance premiums, now about $8,702 per year, cost more than the amount of money remaining in her FHA, which is only about $6,700. Under the terms of the old plan, she would have been entitled to a benefit at least partially funded by IBM's $3,000 contribution maximum for retirees age 65 and older.

Kris has six years of service, but is only 38 years old when the new IBM retiree health plan becomes effective, so she does not qualify for the initial seed deposit. The ten years of company contributions commence when Kris turns 40 in 2001. She leaves the company in the year 2016 after 22 years of service at the age of 55. She decides to purchase the health insurance for herself and her partner through IBM's Network Select plan. Her FHA balance is $50,141. The premium for retiree plus one coverage at that time is $21,622 per year. By the time she is 57 years old, only three years into her retirement, her Future Health Account does not have sufficient funds to pay for health insurance. Under the terms of the old plan, she would have been entitled to a benefit at least partially funded by IBM's $7,000 contribution maximum for retirees younger than age 65.

Kris decides not to leave the company until the year 2026 when she turns age 65 with 32 years of service. Her FHA account has a balance of $98,636. At this time in her life, she decides to purchase IBM Network Select coverage for herself and her partner. Her annual premiums at the age of Medicare eligibility are $14,787. Although Kris's FHA account continues to accrue interest at 7% per year, it is not sufficient to maintain health coverage beyond 7 years of retirement. By the age of 71, Kris no longer has enough funds in her Future Health Account to pay for her annual health insurance premium. Under the terms of the old plan, she would have been entitled to a benefit at least partially funded by IBM's $3,000 contribution maximum for retirees who are age 65 and older.

Retirees Must Buy IBM Benefits, Or They Get Nothing At All

When employees leave the company, they may become eligible to use their accounts to purchase IBM retiree health benefits. To be eligible, employees must have attained age 55 and have at least 15 years of service with IBM as of the date they leave the company. They may access the account to pay for premiums for IBM medical, dental and vision benefits. Alternatively, if employees were age 40 with at least one year of service on June 30, 1999 - the day before the Future Health Accounts plan kicked in - and they also have 30 or more years of service when they leave IBM, then these employees can access their accounts regardless of their age upon leaving the company.

Once an employee leaves the company and meets the eligibility requirements, he or she may elect to use the FHA to pay premiums charged by IBM for health care coverage under its plans. The funds from the FHAs cannot be used for any other purpose - not to pay premiums for coverage under another plan; not to pay deductibles, co-payments, or other out-of-pocket costs. The account balance cannot be cashed out. Moreover, there are no vested rights or guarantees to the funds accumulated in the FHAs, as there would be under a pension benefit.

In fact, IBM describes the accounts as "notional," which is to say that no actual funds are held in the employees' names. The accounts are tracked for record-keeping purposes only. The "contributions" and "earnings" actually come out of IBM operating funds when benefits become payable. There is no asset or trust fund earmarked to provide and protect the retiree health benefit. In other words, there is nothing to guarantee that the benefits will be available when the retirees need them.

Employees who leave IBM and who have accumulated FHAs do not have to use the accounts immediately. However, they must maintain some form of health coverage either through IBM or elsewhere to remain eligible for coverage under IBM's plans.

IBM's Retiree Health Accounts Offer No Security

IBM's change from a defined benefit health plan to a defined contribution health plan raises concerns about the future of retiree health care at IBM. Is the company committed to providing retiree health benefits? Is the company willing to allow workers a voice in designing a retiree benefits package that meets their needs? Is the company willing to provide sufficient financing to the retiree health plan to assure continued access to quality health care for retirees and their dependents throughout their retirement?

The first concern arises because IBM has explicitly reserved the right to terminate the plan without prior approval or notification to the employees or retirees. Since there is no law that requires employers to provide retiree health insurance and since there is no collective bargaining agreement mandating that the company provide retiree health insurance, retirees cannot be assured that the company will not totally eliminate the benefit.

The second concern regarding worker input into the design of the retiree health plan is based on explicit company actions as well. The company changed the plan without consultation with employees about their needs. The old plan was not a top line plan, but it did provide a defined package of health benefits and the company would have paid at least a portion of the cost throughout the retiree's life. The company replaced that plan with an unsecured promise of a contribution to an account.

And lastly, in spite of IBM's attempt to step away from its responsibility to provide retiree health benefits, the company sets strict limits on how retirees might access health benefits.

Funds from the retiree health accounts can only be used to purchase benefits from IBM. A retiree will not be permitted to use the accumulated contributions and earnings to help pay for a benefit plan sponsored by another employer or by a retiree organization like the American Association of Retired Persons, for example.

If employees do not access the accounts to purchase IBM coverage immediately after leaving the company, they must maintain some form of coverage to remain eligible to purchase coverage in the future under any of IBM's plans.

By instituting the Future Health Accounts, IBM has sidestepped the promise of providing retiree health benefits. At the same time, though, by imposing such restrictive rules on how retirees may access their benefits, IBM still controls retirees' options for providing health care protections for themselves and their families.

There are many variables that directly impact the value of the accounts, and which are subject to change by IBM without consultation with or agreement by the employees. The company may change the annual contribution amount, the time period during which contributions are made, the interest rate, the eligibility requirements, and even the package of benefits it makes available for purchase by the retirees. Changes to any one of these variables could end up reducing retiree health protection even more.

IBM Employees Can Secure Their Own Retiree Health Benefits

Without legal or collectively bargained mandates for employers to provide and maintain a retiree health benefits program, IBM retirees will always be vulnerable to the whims of the employer regarding their health security. But there are alternatives. Many unions have used the collective bargaining process to guarantee retiree benefits. Members of the Communications Workers of America (CWA) have negotiated provisions with a variety of employers that make retiree health benefits more affordable and at the same time assure retirees continued access to top quality health care. For example:

Under Section 501(c)(9) of the Internal Revenue Service Code, an employer can make contributions to a trust fund designated to provide retiree health benefits. The trust assures that retiree health benefits are funded, as opposed to IBM's current practice of funding for retiree health benefits on a "pay as you go" basis. The trust will provide some protections from the whims of changing leadership or policy decisions by harboring past contributions for the designated use. Employer contributions to these funds, called Voluntary Employee Benefit Associations (VEBAs), are tax advantaged. Moreover, if the retiree health plan and fund are established pursuant to a collective bargaining agreement, the tax advantages are even more liberal. CWA has negotiated retiree health benefit funds under these terms with several employers including AT&T, Lucent, and Bell Atlantic.

If an employer-sponsored pension plan is overfunded, with more assets than accrued liabilities, then pension law allows the employer to transfer some of the excess assets, but only if it is used to benefit plan participants. Many large employers with overfunded pension plans have taken advantage of this provision as a vehicle to pay for retiree health benefits. The pension fund must remain overfunded by at least 25% even after the transfer takes place and the pension rights of all plan participants must be fully vested immediately. Employers are allowed to transfer annually up to the amount that would be paid in a year for retiree health care coverage. This provision of pension law enables an employer to fund retiree health care more easily. Monies that might otherwise be used to pay retiree health care costs as the costs are incurred can then be used to fund the VEBA for future retiree health costs. If a collective bargaining agreement covering pensions and retirement income exists, then the employer must negotiate with the union over the terms of the transfer. CWA has negotiated such pension asset transfers in order to secure retiree health benefits with a number of employers, including AT&T and Bell Atlantic.

Currently, IBM limits the amount it will pay annually for retiree health care to $7,000 per year for retirees under age 65 and to $3,000 for retirees age 65 and older. If a collective bargaining relationship existed, these limits would be subject to negotiations with the union. In similar situations at other companies, CWA has negotiated increases in the employer contribution limit, assuring that the limit is high enough to preclude retiree premium sharing during the term of the collective bargaining agreement. (See CWA contracts with SBC, Pacific Bell and others.)

In some collective bargaining agreements, CWA has negotiated "hold harmless" language that delays any contributions from retirees, should health costs exceed the company contribution limit, until after another round of bargaining. That allows the union another opportunity to bargain over the subject again. (See CWA contracts with AT&T, Lucent, SBC, Pacific Telesis, and others.)

To assure that employers do not unilaterally cut retiree health benefits, CWA has negotiated contract language that links the retiree health benefits package with the package of benefits offered to active employees. (See CWA contracts with AT&T, Lucent, Bell Atlantic and others.)

The examples above, when negotiated in combination, provide a safety net for retiree health benefits. IBM employees, working together through their own union, can craft a bargaining agenda that meets their own needs to develop of safety net of their own.


1."Survey Finds More Rapid Health Care Cost Growth in 1999," Towers Perrin news release, January 6, 1999.

2. For the examples used in this analysis, CWA has borrowed assumptions used by IBM in its Summary Plan Description of the Future Health Accounts. The assumptions are: that the annual deposit is $2,500 for 10 years beginning at age 40 for each employee who has at least one year of service; that the interest rate remains at 7% throughout the existence of the FHAs. In addition, to show the impact of premium payments upon the FHA balances, CWA uses additional assumptions: that the retirees in each example elected to purchase coverage only for themselves and one dependent; that the 1999 annual premium for this coverage for pre-age 65 retirees was $4,900 for HMO plans, $6,700 for Network Select, and $7,500 for the self-managed plan; that the 1999 annual premium for this coverage for retirees age 65 and older was $2,100 for HMO plans, $3,200 for Network Select, and $4,000 for the self-managed plan; that premiums for all plans continue to grow, but at different rates depending on the age of the retiree. For retirees under age 65, CWA assumes that health costs will grow at about 7.7% in 2000, and the rate will increase to 7.9% in 2001, but gradually rates moderate to about a 7% growth beginning in the year 2003. For retirees age 65 and older, CWA assumes that health costs will grow at about 6.7% in 2000, rise to about 6.9% in 2001, and will gradually moderate to a 5.6% growth rate in the year 2008 and thereafter. Examples 1 and 2 are provided by CWA to illustrate what happens to retirees who miss being grandfathered under the terms of the old plan. Examples 3, 4, and 5 are taken directly from IBM's summary plan description and enhanced by CWA's additional assumptions about health costs.

3. See Section of the IBM Future Health Account Summary Plan Description.

4. See Section 1.3.6 of the IBM Future Health Accounts Summary Plan Description.

5. See Section 1.3.6 of the IBM Future Health Accounts Summary Plan Description.

Prepared by the CWA Research Department -November 1999-