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Introduction to Health Reimbursement Arrangements HRAs City of Sarasota Presented by: Mark R. Wilkerson, CFP HRA Consultant December 1, 2004.

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Presentation on theme: "Introduction to Health Reimbursement Arrangements HRAs City of Sarasota Presented by: Mark R. Wilkerson, CFP HRA Consultant December 1, 2004."— Presentation transcript:

1 Introduction to Health Reimbursement Arrangements HRAs City of Sarasota Presented by: Mark R. Wilkerson, CFP HRA Consultant December 1, 2004

2 Topics HRA Team Growing Need HRA Basics HRA Advantages Eligible Expenses Trust Structures Adoption Implementation and Ongoing Administrative Process Group Structures & Voting Contribution Requirements Employer Funding Sources Aggressive HRA Plan Designs VALIC National HRA Plan

3 HRA Service Team Combining: u AIG VALIC - education and enrollment expertise and resources u HRA Consultants - HRA experience u Rehn & Associates, Inc. - HRA third party administration experience

4 AIG VALIC Education Services Enrollment Services Special Pay Plan Companion

5 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

6 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

7 Growing Need for HRAs (post-employment medical funding) 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. Current Age Your Projected Total 5% Increases 60$247,893 55$316,381 50$403,791 45$515,351 40$657,733

8 Monthly Growth Example What will my account be worth when I retire? $15,499 $10055 $40,746 $10045 $81,870 $10035 $148,856$10025 Balance at age 65 w/ 5% return Monthly Employer Contribution Starting Age

9 $40,000 Cash-Out Without an HRA $40,000 available 25% federal income tax 7.65% FICA tax Cash $ 40, ,060 Taxes $ 26,940Net Cash

10 $40,000 With HRA Contribution $ 40,000 Benefit - 0 Taxes $ 40,000HRA Balance $40,000 benefit available

11 HRA Basics Provide reimbursements of medical expenses only u In-service and/or post-retirement Employer contributions only (no contribution limits) Reimbursements limited to account balance u Carry forward from year to year IRS Notice , HRAs Revenue Ruling , HRAs Revenue Ruling – Coordinating HSAs, HRAs, & FSAs

12 Employee/Participant Advantages u Tax-free Contributions Earnings Withdrawals for qualified expenses u Excellent resource to pay the rapidly rising cost of post- employment health care u List of qualified expenses is quite extensive u Portable u Unused balances carryover u Allocated accounts with ability to self-direct investments

13 Employee/Participant (cont.) Disadvantages u Limited to medical only u Group contributions and decision process

14 Employer Advantages u FICA savings u Offer employees new benefit u Solution to job-locked employee problem u Means of pre-funding retiree health care obligation u May choose vesting schedule for post-employment benefits

15 Employer (cont.) Disadvantages u 105(h) non-discrimination rules apply u New benefit requires assistance with administration u New cost if custom plan used

16 Whos expenses are eligible? Employee/retiree Spouse Qualified dependents

17 Qualified Insurance Premiums Medical Dental Vision Long-term care (tax-qualified) Medicare Part B Medicare supplements

18 Qualified Expenses Expenses defined in Internal Revenue Code Section 213(d) Medical, dental, and vision expenses not paid by insurance u Co-pays, deductibles, co-insurance u Prescription and certain over-the-counter drugs (OTC) u Crowns u Eyeglasses, etc.

19 Trust Structures Expertise in both 501(c)(9) VEBA and 115 trusts VEBAs u VEBA stands for voluntary employees beneficiary association u Rely on 501(c)(9) letter of determination from IRS u Stand alone VEBA more expensive to develop and maintain than a multiple employer turnkey plan u Multiple employer VEBA subjects employers to non- discrimination violations of other employers

20 Trust Structures (cont.) Individual 115 trusts u 115 trust also known as governmental integral part trust u No legal approval required for HRA offered within 115 trust Rely on private letter rulings u Private letter ruling may optionally be obtained by individual employers u Insulates employer from non-discrimination violations of other employers

21 Adoption Implementation and Ongoing Administrative Process Employer Responsibilities u CBA or Employer Policy u Adopt Adoption Agreement Plan and Trust u Contributions u Notify TPA of employee eligibility for distributions u Instruct TPA of any forfeiture reallocations of unvested accounts u Notify TPA of COBRA events

22 Adoption Implementation and Ongoing Administrative Process Turnkey Plan – Services Provided u New employee education u Enrollment u Participant service u Claims u Account statements u Website u COBRA Compliance u HIPAA Compliance u Audit/Tax forms filed

23 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

24 Employer Funding Sources Sick leave or vacation leave cash-outs (terminal payments) u Cash choice must be eliminated Other leave cash-outs Monthly employer contributions Unused monthly benefit dollars Percent of pay (group salary reduction) u Through collective bargaining or for post-employment benefits only Other

25 Group Structures & Voting – No Individual Choice! Collective Bargaining Groups/Non-Represented u 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 u Monthly Contributions Percent of pay Flat dollar amount - $100 Eligibility may vary by age or pension plan or other criteria – CBA only

26 Aggressive HRA Plan Designs Medical benefits plus severance, death, and small account cash- outs (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)

27 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

28 Questions and Answers

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