Transcript No Slide Title

City of Sarasota
Introduction to
Health
Reimbursement
Arrangements
“HRAs”
Presented by:
Mark R. Wilkerson, CFP
HRA Consultant
December 1, 2004
Topics

HRA Team

Group Structures & Voting

Growing Need

Contribution Requirements

HRA Basics

Employer Funding Sources

HRA Advantages

Aggressive HRA Plan Designs

Eligible Expenses

VALIC National HRA Plan

Trust Structures

Adoption Implementation and
Ongoing Administrative
Process
HRA Service Team

Combining:

AIG VALIC - education and enrollment expertise and
resources

HRA Consultants - HRA experience

Rehn & Associates, Inc. - HRA third party
administration experience
AIG VALIC

Education Services

Enrollment Services

Special Pay Plan Companion
HRA Consultants, a Division of VSG

21 years HRA consulting experience with
governmental employers

7 trust clients

Single or multiple employer plans

30,000+ participants

400+ employers

Custom or turnkey plans
Rehn & Associates, Inc.

TPA with more than 40 years
experience

11 years HRA experience

30,000+ HRA accounts

400+ HRA participating employers

Employer billing services

Individual participant services

Claims adjudication

Account service

Statement generation

Online participant account access
 COBRA Administration
 HIPAA Compliance
Growing Need for HRAs
(post-employment medical funding)
Current Age
Your Projected Total Cost
@ 5% Increases
60
$247,893
55
$316,381
50
$403,791
45
$515,351
40
$657,733
The projections listed above are the amounts that a Washington retiree and spouse could spend
during their lifetime assuming retirement at age 60, participation in the State of Washington
PEBB Uniform Medical Plan, living a normal life expectancy to age 84, assuming purchase of
medical insurance and dental insurance for retiree and spouse, plus annual out-of-pocket
expenditures of $500 on non-covered items. We assume 5% annual increases for premiums and
non-covered out-of-pocket costs.
Current PEBB premiums before age 65 for retiree and spouse are $7,700 per year for medical
insurance and $850 per year for dental insurance. Current PEBB Medicare supplement
premiums are $3,500 per year for retiree and spouse.
Monthly Growth Example
What will my account be worth
when I retire?
Starting Age
Monthly Employer
Contribution
Balance at age 65 w/ 5%
return
25
$100
$148,856
35
$100
$81,870
45
$100
$40,746
55
$100
$15,499
$40,000 Cash-Out Without an HRA



$40,000 available
25% federal
income tax
7.65% FICA tax
$ 40,000 Cash
- 13,060 Taxes
$ 26,940 Net Cash
$40,000 With HRA Contribution

$40,000 benefit
available
$ 40,000 Benefit
0 Taxes
$ 40,000 HRA Balance
HRA Basics

Provide reimbursements of medical expenses only

In-service and/or post-retirement

Employer contributions only (no contribution limits)

Reimbursements limited to account balance

Carry forward from year to year

IRS Notice 2002-45, HRAs
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Revenue Ruling 2002-41, HRAs

Revenue Ruling 2004-45 – Coordinating HSAs, HRAs, & FSAs
Employee/Participant

Advantages

Tax-free
—
Contributions
—
Earnings
—
Withdrawals for qualified expenses

Excellent resource to pay the rapidly rising cost of postemployment health care

List of qualified expenses is quite extensive

Portable

Unused balances carryover

Allocated accounts with ability to self-direct investments
Employee/Participant (cont.)

Disadvantages

Limited to medical only

Group contributions and decision process
Employer

Advantages

FICA savings

Offer employees new benefit

Solution to job-locked employee problem

Means of pre-funding retiree health care obligation

May choose vesting schedule for post-employment
benefits
Employer (cont.)

Disadvantages

105(h) non-discrimination rules apply

New benefit requires assistance with administration

New cost if custom plan used
Who’s expenses are eligible?

Employee/retiree

Spouse

Qualified dependents
Qualified Insurance Premiums

Medical

Dental

Vision

Long-term care (tax-qualified)

Medicare Part B

Medicare supplements
Qualified Expenses


Expenses defined in Internal Revenue Code Section
213(d)
Medical, dental, and vision expenses not paid by
insurance

Co-pays, deductibles, co-insurance

Prescription and certain over-the-counter drugs (OTC)

Crowns

Eyeglasses, etc.
Trust Structures

Expertise in both 501(c)(9) VEBA and 115 trusts

VEBAs

VEBA stands for “voluntary employees’ beneficiary
association”

Rely on 501(c)(9) letter of determination from IRS

Stand alone VEBA more expensive to develop and
maintain than a multiple employer turnkey plan

Multiple employer VEBA subjects employers to nondiscrimination violations of other employers
Trust Structures (cont.)

Individual 115 trusts

115 trust also known as governmental integral part trust

No legal approval required for HRA offered within 115
trust
— Rely
on private letter rulings

Private letter ruling may optionally be obtained by
individual employers

Insulates employer from non-discrimination violations
of other employers
Adoption Implementation and
Ongoing Administrative Process

Employer Responsibilities

CBA or Employer Policy

Adopt Adoption Agreement Plan and Trust

Contributions

Notify TPA of employee eligibility for distributions

Instruct TPA of any forfeiture reallocations of unvested
accounts

Notify TPA of COBRA events
Adoption Implementation and
Ongoing Administrative Process

Turnkey Plan – Services Provided

New employee education

Website

Enrollment

COBRA Compliance

Participant service

HIPAA Compliance

Claims

Audit/Tax forms filed

Account statements
Contribution Requirements





Must be employer contributions
Collective bargaining or employer policy change can
recharacterize compensation from salary to employer
HRA contributions
All employees defined as eligible must be treated
uniformly
Must eliminate individual choice of salary vs. HRA
contribution
More flexibility in collective bargaining groups
Employer Funding Sources

Sick leave or vacation leave cash-outs (terminal payments)

Cash choice must be eliminated

Other leave cash-outs

Monthly employer contributions

Unused monthly benefit dollars

Percent of pay (group salary reduction)


Through collective bargaining or for post-employment benefits
only
Other
Group Structures & Voting –
No Individual Choice!

Collective Bargaining Groups/Non-Represented

Termination Payment Contributions
— Vote
each collective bargaining agreement or annually
— Members “eligible” to retire may vote
— Can split-percent in cash and percent to HRA

Monthly Contributions
— Percent
of pay
— Flat dollar amount - $100
— Eligibility may vary by age or pension plan or other criteria – CBA only
Aggressive HRA Plan Designs





Medical benefits plus severance, death, and small account cashouts (disqualifies 105(b) exclusion)
Individual election of salary or sick leave (contributions probably
subject to income and employment tax withholding)
After-tax contributions (probably no exclusion from income on
earnings or benefits)
Claim account is not an HRA
Questions? - Call IRS Office of Chief Counsel Employee Benefits
Division: (202)622-6080
VALIC National HRA Plan

115 trust

Employer self-trusteed

12 mutual fund options

1 money market fund

5 – 50 BP fund management expense

Per participant fee

BP administrative fee
Questions and Answers