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Introduction to Health Reimbursement Arrangements “HRAs”

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1 Introduction to Health Reimbursement Arrangements “HRAs”
City of Sarasota Introduction to Health Reimbursement Arrangements “HRAs” READ This section introduces AIG VALIC’s competitive plan pricing. 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:
AIG VALIC - education and enrollment expertise and resources HRA Consultants - HRA experience Rehn & Associates, Inc. - HRA third party administration experience READ Also, in the transition stage our administration and record keeping services are provided by a team of dedicated experts in both our Home Office in Houston, Texas and our Regional Office. READ Coordination of services is ensured by an assigned relationship manager, [NAME OF RM] who is the primary point of contact. READ In addition, we develop and provide you a plan administration manual to serve as a guideline. READ You will be provided verbal and written transition status updates to keep everyone up-to-date through this period before the plan sponsor enrollment phase begins.

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 READ Also, in the transition stage our administration and record keeping services are provided by a team of dedicated experts in both our Home Office in Houston, Texas and our Regional Office. READ Coordination of services is ensured by an assigned relationship manager, [NAME OF RM] who is the primary point of contact. READ In addition, we develop and provide you a plan administration manual to serve as a guideline. READ You will be provided verbal and written transition status updates to keep everyone up-to-date through this period before the plan sponsor enrollment phase begins.

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 READ Also, in the transition stage our administration and record keeping services are provided by a team of dedicated experts in both our Home Office in Houston, Texas and our Regional Office. READ Coordination of services is ensured by an assigned relationship manager, [NAME OF RM] who is the primary point of contact. READ In addition, we develop and provide you a plan administration manual to serve as a guideline. READ You will be provided verbal and written transition status updates to keep everyone up-to-date through this period before the plan sponsor enrollment phase begins.

7 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.

8 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

9 $40,000 Cash-Out Without an HRA
$40,000 available 25% federal income tax 7.65% FICA tax Cash $ 40,000 - 13,060 Taxes $ 26,940 Net Cash

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

11 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 , HRAs Revenue Ruling , HRAs Revenue Ruling – Coordinating HSAs, HRAs, & FSAs READ Also, in the transition stage our administration and record keeping services are provided by a team of dedicated experts in both our Home Office in Houston, Texas and our Regional Office. READ Coordination of services is ensured by an assigned relationship manager, [NAME OF RM] who is the primary point of contact. READ In addition, we develop and provide you a plan administration manual to serve as a guideline. READ You will be provided verbal and written transition status updates to keep everyone up-to-date through this period before the plan sponsor enrollment phase begins.

12 Employee/Participant
Advantages Tax-free Contributions Earnings Withdrawals for qualified expenses Excellent resource to pay the rapidly rising cost of post- employment health care List of qualified expenses is quite extensive Portable Unused balances carryover Allocated accounts with ability to self-direct investments READ Also, in the transition stage our administration and record keeping services are provided by a team of dedicated experts in both our Home Office in Houston, Texas and our Regional Office. READ Coordination of services is ensured by an assigned relationship manager, [NAME OF RM] who is the primary point of contact. READ In addition, we develop and provide you a plan administration manual to serve as a guideline. READ You will be provided verbal and written transition status updates to keep everyone up-to-date through this period before the plan sponsor enrollment phase begins.

13 Employee/Participant (cont.)
Disadvantages Limited to medical only Group contributions and decision process READ Also, in the transition stage our administration and record keeping services are provided by a team of dedicated experts in both our Home Office in Houston, Texas and our Regional Office. READ Coordination of services is ensured by an assigned relationship manager, [NAME OF RM] who is the primary point of contact. READ In addition, we develop and provide you a plan administration manual to serve as a guideline. READ You will be provided verbal and written transition status updates to keep everyone up-to-date through this period before the plan sponsor enrollment phase begins.

14 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 READ Also, in the transition stage our administration and record keeping services are provided by a team of dedicated experts in both our Home Office in Houston, Texas and our Regional Office. READ Coordination of services is ensured by an assigned relationship manager, [NAME OF RM] who is the primary point of contact. READ In addition, we develop and provide you a plan administration manual to serve as a guideline. READ You will be provided verbal and written transition status updates to keep everyone up-to-date through this period before the plan sponsor enrollment phase begins.

15 Employer (cont.) Disadvantages 105(h) non-discrimination rules apply
New benefit requires assistance with administration New cost if custom plan used READ Also, in the transition stage our administration and record keeping services are provided by a team of dedicated experts in both our Home Office in Houston, Texas and our Regional Office. READ Coordination of services is ensured by an assigned relationship manager, [NAME OF RM] who is the primary point of contact. READ In addition, we develop and provide you a plan administration manual to serve as a guideline. READ You will be provided verbal and written transition status updates to keep everyone up-to-date through this period before the plan sponsor enrollment phase begins.

16 Who’s 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 Co-pays, deductibles, co-insurance Prescription and certain over-the-counter drugs (OTC) Crowns Eyeglasses, etc.

19 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 non- discrimination violations of other employers READ Also, in the transition stage our administration and record keeping services are provided by a team of dedicated experts in both our Home Office in Houston, Texas and our Regional Office. READ Coordination of services is ensured by an assigned relationship manager, [NAME OF RM] who is the primary point of contact. READ In addition, we develop and provide you a plan administration manual to serve as a guideline. READ You will be provided verbal and written transition status updates to keep everyone up-to-date through this period before the plan sponsor enrollment phase begins.

20 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 READ Also, in the transition stage our administration and record keeping services are provided by a team of dedicated experts in both our Home Office in Houston, Texas and our Regional Office. READ Coordination of services is ensured by an assigned relationship manager, [NAME OF RM] who is the primary point of contact. READ In addition, we develop and provide you a plan administration manual to serve as a guideline. READ You will be provided verbal and written transition status updates to keep everyone up-to-date through this period before the plan sponsor enrollment phase begins.

21 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

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

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) 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 READ Also, in the transition stage our administration and record keeping services are provided by a team of dedicated experts in both our Home Office in Houston, Texas and our Regional Office. READ Coordination of services is ensured by an assigned relationship manager, [NAME OF RM] who is the primary point of contact. READ In addition, we develop and provide you a plan administration manual to serve as a guideline. READ You will be provided verbal and written transition status updates to keep everyone up-to-date through this period before the plan sponsor enrollment phase begins.

25 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

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 READ Now we would like to open the discussion to any questions or comments that you may have at this time. Once questions are completed READ Thank you for your time today. We believe that the plan sponsor and participant services you have learned about can provide [NAME GROUP] with the right type of financial services to offer your participants a successful retirement.


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