PREFUNDING PROGRAM HIGHLIGHTS

Beginning January 1, 1990, eligible employees MUST prefund in order to receive retiree medical coverage. Employees must make a monthly contribution for at least 10 years immediately preceding retirement to help pay for (prefund) their future retirement medical coverage. (Employees who were on payroll as of December 31, 1989 and retire before January 1, 2000 and who otherwise qualify for retiree medical coverage only need to prefund continuously from the date they are first eligible.)

Prefunding is offered to employees who are at least 30 years old with one year of service. Employees who desire to prefund will start contributing on the first of the month after meeting both requirements.

If you leave the Company prior to retirement, you will receive the value of your contributions. While you are an active employee, your contributions are matched by the Company. The funds are kept in a trust and the money in the trust is invested. If you terminate employment or die while an active employee, the value of your contributions (and investment experience) will be refunded to you or your beneficiary. Company-matched funds are not, however, distributed to you or your beneficiary in the event you leave the Company prior to retirement or if you die. The Company matching funds are used to pay other retiree medical claims.

IF YOU DECIDE TO PREFUND, NO ACTION IS REQUIRED. Payroll deductions will begin automatically the month following when you become eligible. Contributions will be deducted equally from either two or four paychecks per month, depending on your pay type.

THERE ARE TWO TYPES OF RATES. Flat Rates are not based on age and apply to employees on active payroll as of December 31, 1989, or earlier -- who elect to prefund when first eligible. The Flat Rate for 1998 is $11.82 per month. Age-Based Rates are based on age groups. These rates apply to employees hired January 1, 1990 or later, employees who choose not to participate when first eligible and later enroll, and employees who discontinue contributions and later elect to rejoin. (Age-Based Rates for 1998 are listed in Answer #12 in the attached Prefunding Questions & Answers)

IF YOU DO NOT WISH TO PARTICIPATE, you must complete and return a waiver form at least two weeks prior to your eligibility date. Your spouse and Supervisor or Manager must also sign the form. Your spouse must sign because you are giving up medical benefits for your spouse and eligible dependents when you retire. If your waiver is not received within 60 days of your eligibility date, your prefunding deductions will not be canceled retroactive to your eligibility date, but rather will cease effective with the date your waiver is received.

You can reject participation, however, neither you nor your eligible dependents will receive retiree medical coverage and the Company will not reimburse you for medical expenses after retirement. In addition, if you must retire early due to a disability and you did not prefund, you will not be eligible for retiree medical benefits.

If you decline, you can enroll at a later date but it will cost you more. You will pay the Prefunding rates then in effect for your age group (Age-Based Rates) and you will also pay a $250 late enrollment fee. Age-Based Rates also apply to employees hired on or after January 1, 1990, or later and employees who discontinue contributions and later elect to rejoin. However, if you do not elect to enroll in Prefunding when first eligible, and you plan to retire in less than ten years, you will not have another opportunity to enroll and will not have retiree medical coverage.

PREFUNDING QUESTIONS & ANSWERS

GENERAL PREFUNDING INFORMATION

Q1: What is Prefunding?

A3: Prefunding is one of the eligibility requirements to participate in the retiree medical expense benefits plan. Active employees will make a monthly contribution to help pay for (prefund) future retirement medical care.

Q2: Why does the Company require employees to prefund retiree medical benefits?

A2: In recent years, medical costs have risen very rapidly, for both active and retired employees. The corporation's current liability for providing medical benefits for current retirees and current employees who will later retire is estimated to be nearly one billion dollars. To help offset a portion of this cost, active employees need to contribute toward their future retirement benefits. Most companies require employees to contribute after they retire and are on a fixed income. We developed a creative solution that allows employees to contribute now while they are earning money and can better afford to contribute.

Q3: What's in it for me?

A3: If you work for an AMR subsidiary that participates in Prefunding and meet the other eligibility criteria for retiree medical benefits, you and your eligible dependents will receive coverage under the Company's medical expense benefits plan for retirees (as it is in effect at the time of your retirement) if you prefund. If you leave the Company prior to retirement, you will receive the value of your contributions, plus investment experience. In addition, your Company will match contributions you make under the Prefunding plan on a dollar for dollar basis. The matching contribution the Company makes on your behalf will significantly increase the amount of money set aside for the payment of future medical claims.

Q4: What if I do not prefund?

A4: If you do not participate in Prefunding, neither you nor your eligible dependents will receive retiree medical coverage and the Company will not reimburse you for medical expenses after retirement.

Q5: How do I know that the funds contributed by employees for Prefunding will be available for medical benefits and not used for other purposes?

A5: Employee contributions will go into a special trust established to provide medical benefits for retirees. Because the funds are in a trust, the Company cannot use or divert the funds for any purpose other than providing benefits. Your contributions and your Company's matching contribution will be assigned specifically to your Prefunding account.

Q6: Do other companies require prefunding?

A6: Many companies have inquired about our Prefunding program, but we are not aware of others using a Prefunding program like ours. The Company received the "1993 Creative Excellence in Benefits Award" for creative excellence in plan design from the International Foundation of Employee Benefit Plans. The award recognized Prefunding as a creative alternative to requiring contributions for coverage after employees retire (which is the way most companies fund retiree medical benefits).

ELIGIBILITY

Q7: What are the eligibility requirements to participate in Prefunding?

A7: You may begin to prefund on the first day of the month after you reach age 30 and complete one year of service.

Q8: When will I start to contribute?

A8: You will be eligible to start contributions on the first of the month after you reach age 30 and have completed one year of service.

Q9: How many years must I make contributions in order to be eligible for retiree medical coverage?

A9: You must prefund for at least the ten years immediately preceding your retirement in order to qualify for retiree medical benefits. However, if you retire before January 1, 2000, and otherwise meet the plan's eligibility requirements (i.e., ten years of company seniority) and continuously prefund from the date you are first eligible, you will receive retiree coverage even though you have not continuously participated for ten years.

Q10: I am in a Health Maintenance Organization (HMO); do I need to prefund?

A10: If you desire retiree medical benefits, you need to prefund. HMOs are not available to retirees. Employees who participate in HMOs move back into the standard (indemnity) retiree medical plan once they retire. HMO participants must prefund to be eligible for the retiree medical coverage.

REJECTION OF COVERAGE

Q11: What if I decide not to participate when first eligible, but later decide I need this coverage?

A11: You may elect to begin prefunding at any time by paying the $250 late enrollment fee, however you must prefund at least 10 years immediately preceding retirement to qualify for your retiree medical coverage. For additional information on late enrollment, contact the Employee Service Center.

CONTRIBUTIONS

Q12: What are the Prefunding rates?

A12: There are two sets of rates:

Flat Rates are not based on age and apply to employees on active payroll as of December 31, 1989, or earlier who elect to prefund when first eligible. The Flat Rate for 1998 is $11.82 per month.

Age-Based Rates are based on age groups. These rates apply to:

• employees hired January 1, 1990 or later,
• employees who choose not to participate when first eligible and later enroll,
• employees who discontinue contributions and later elect to rejoin.

Age-Based Rates for 1998 are:

Q13: Why is the Flat Rate lower?

A13: The Flat Rate ($11.82 per month), which applies to eligible employees on payroll on December 31, 1989, recognizes that many employees have substantial service with the Company. Thus. those long service employees will contribute substantially less for their retiree coverage in order to recognize their years of service, but will receive the same benefits as shorter service employees.

Q14: Why are the Age-Based Rates so high for older employees who join the company on or after January 1, 1990?

A14: These higher Age-Based Rates more accurately reflect the amount of medical benefits older employees might use after retirement. Since they are closer to retirement than a younger employee and will prefund for only the minimum amount of time, it is reasonable that they contribute a higher rate toward the cost of their retiree coverage.

Q15: I was an active employee as of December 31, 1989, but I'm not 30 years old yet. What will my contribution rate be when I turn 30?

A15: If you were on the active payroll on or before December 31, 1989, you will pay the Flat Rate (lower, non-Age-Based Rate) if you enroll in Prefunding when you are first eligible (i.e., when you reach age 30 and attain one year of company service).

Q16: I am a part-time employee; what will it cost me to participate?

A16: Rates for part-time employees are the same as those for full-time employees, since the retiree medical coverage provided to part-time and full-time employees is the same.

Q17: What would it cost to buy this coverage on the outside?

A17: United Healthcare does not sell any coverage comparable in cost to the group medical plan as an individual policy. You are free to see if other insurance carriers provide such coverage at better rates. Remember that the cost of individual health insurance coverage will increase as you get older.

Q18: Will I be taxed on these contributions?

A18: The contributions you make to the plan are after-tax contributions. IRS Regulations do not permit you to pay these contributions on a pre-tax basis. If you terminate employment or die, you or your beneficiary will receive the value of your contributions (plus investment experience) and you will not be taxed on the amount of your contributions. However, any investment income your contributions have earned will be taxable just like a credit union or savings account.

Q19: If I leave the Company and take the value of my contributions and then return a few years later, what rate must I pay?

A19: The contribution rate will be based on the Age-Based Schedule in effect at the time of re employment. The rate will be the same as the rate for a new employee and there will be no late enrollment fee.

Q20: Where will my contributions be invested?

A20: Your contributions are deposited in a legally protected trust. The current trustee is State Street Bank, and AMR Investment Services oversees the investment management of the trust funds. Funds will be invested similar to the way Long Term Disability and pension funds are invested.

Q21: What if the cost of my retiree medical coverage exceeds the amount of my   contributions?

A21: The Company will pay the additional costs. In fact, given the Prefunding rates that have been established, employee contributions will cover only a small portion of the total cost of retiree medical coverage.

Q22: If I decide to participate, will the rate change over my working life?

A22: If the Company's cost of providing retiree medical coverage increases, these increases will be shared equally between the employee and the Company, up to a maximum as described below. Increases will be necessary only to offset future cost increases of providing retiree medical care. Retiree medical coverage inflation is reviewed each fall and rates are adjusted for the next calendar year, as applicable.

Q23: How are Prefunding rates calculated?

A23: You and the Company will share equally in any percentage increase in retiree medical inflation each year. However, your increase in any year will be constrained by a dollar maximum increase (cap) as shown below:

Q24: If retiree medical costs decrease, will the employee contribution rate decrease?

A24: No, if retiree medical costs decrease, the rate will remain flat for the following year.

Q25: What if I pay for ten years and stop?

A25: You must contribute for at least ten years immediately preceding your retirement to qualify for retiree medical benefits. If you stop contributions, you will not receive medical coverage.

Q26: Can I wait and start ten years before I retire?

A26: Yes, but you will pay the higher Age-Based Rates and a late enrollment fee. However, it is difficult to predict your retirement date with certainty. For example, as a result of a disability, it is possible to be eligible for the retiree medical plan, but if you had not prefunded for the preceding 10 years, you would not be covered under the retiree medical plan.

Q27: Can I take the money instead of benefits if I retire?

A27: No. The Prefunding program is a way for you to pay in advance for a portion of your post retirement medical coverage. It is not a retirement savings account.

Q28: How often will the payroll deduction be taken?

A28: Contributions will be deducted from either two or four paychecks per month, depending on your pay type.

TERMINATION OF EMPLOYMENT, DEATH, DISABILITY, LEAVES OF ABSENCE

Q29: If leave the Company or if I should die before I retire, what happens to my contributions?

A29: While you are an active employee, your contributions will be kept in a separate account in the trust. If you terminate employment or if you die while an active employee, the value of these contributions will be paid as a severance to you or a payment upon your death to your beneficiary. You will not receive the value of the Company match. In this situation, the Company matching funds would be used to pay other retiree medical claims.

Q30: If I die soon after retirement, is there any value of the Prefunding benefit to my dependents?

A30: The value of each retiree's Prefunding account will be "drawn down" in equal installments over the first ten years of retirement. What this means is that each year after retirement, one tenth of the funds will be automatically transferred out of your Prefunding account to help pay for retiree medical benefits. The annual "draw down" occurs regardless of whether or not you actually file medical claims during that year. The balance remains in your account until the tenth year "draw down". If you die during the first ten years of retirement and you do not have a surviving spouse to receive retiree medical benefits, the outstanding balance of your contributions will be distributed to your beneficiary or estate. (Please note that even after your Prefunding account is completely drawn down, you will continue to receive retiree medical benefits according to the plan's provisions and up to the limits specified in the plan.)

Q31: Can I stop contributions if I change my mind at a later date?

A31: Yes. You may discontinue contributions at any time. However, according to IRS regulations, your account balance must remain on deposit until you terminate your employment with AMR or die. However, should you later decide to rejoin the plan, you will pay a $250 re-enrollment fee, you will pay the higher rate in effect for your age group upon re-enrollment (Age-Based Rates) and you must prefund for the ten years immediately prior to retirement in order to be eligible for retiree coverage.  

Q32: What happens if coverage? becoming eligible for retiree medical become disabled before

A32: Initially, you will continue to receive active employee medical benefits under the Company's unpaid sick and injury on duty (IOD) leave of absence policies. Coverage ends after two years on an unpaid sick or injury on duty leave of absence, at which time you and your eligible dependents will receive retiree medical expense coverage if:

1. you are receiving Social Security Disability Benefits and
2. you have at least ten years of company seniority, and you continuously prefunded retiree medical coverage up to the start of your unpaid sick or injury on duty leave of absence.

Retiree coverage for you and your eligible dependents will continue as long as you remain disabled and receive Social Security Disability Benefits.

Q33: What happens if I'm on a leave of absence or injury on duty during Prefunding enrollment?

A33. Regardless of the type of leave of absence you are on, if you have reached age 30 and completed at least one year of service, you are eligible for Prefunding effective the first of the following month. If you are eligible, and if you decide to prefund, no action is required.

If you are on an unpaid sick or injury on duty leave of absence, your Prefunding premiums are waived while you are out. Effective with your return to work, payroll deductions will begin automatically.

If you are on a personal, overage, military or family leave of absence, effective with your return to work, payroll deductions will begin automatically and the amount due for Prefunding (retroactive to your eligibility date) will also be deducted from your paycheck. However, you may choose to make a lump sum payment or monthly payments from your eligibility date through the balance of your leave of absence to avoid having the retroactive deductions upon returning to work. To initiate a lump sum or monthly payments, contact the Employee Service Center.

Q34: Is Prefunding tied to any government programs such as Medicare or Social Security?

A34: No. Prefunding is an eligibilty  requirement to participate in the Company's retiree medical plan. However, medical benefits under this plan must still be coordinated with Medicare if you are eligible for Medicare.

SUMMARY

Q35: Why should I prefund my retiree medical benefits?

A35: You receive retiree medical benefits only if you do participate. You will receive the value of your contributions if you terminate employment.