Health Reimbursement Account Veba Overview For Public Employees Presented by: Melanie Denning, VEBA Health Officer Health Care & Benefits Division Dept. of Administration VEBA Montana Health Reimbursement Account

Handouts Possible Group Contributions PERS Example Summary of Benefits – example List of eligible expenses Q/A Document – NOTE: This is specific to State employees eligible for VEBA List of Current Quarter Fund Performance Enrollment Form The packet that you have consists of: 1. Summary of Benefits sheet – This document attempts to cover what is covered in the slide presentation at a high level. 2. The next page is a list of things that you may use your VEBA account for. We will discuss this in more detail later. 3. Q & A Document – This is a nice resource to go back to if you have further questions on the VEBA. NOTE: State version vs. Other Public Entities 4. The last page is a summary of the Fund Performance of the investments available to a VEBA Member. This summary is as of 4th Quarter of 2003.

History of VEBA Drafted SB51-passed April, 2001 to 2-18-1301, MCA Began offering to State, Cities, Counties, K-12 & University system employees in September, 2003. SB 168 passed during the 2007 session which allows an additional source of contribution. Public entity employers including representatives from City, County and State Government as well as K-12 and University System employers were asked to look in to options to assist employees with the high cost of Medical Insurance and expenses in retirement. The group was established and work was done to come up with a plan to do that. A VEBA seemed to provide the best answer. They have been around since about 1928. Federal legislative changes were made in the early 1980’s that allow VEBA’s to operate as they do today. The group obtained VEBA Service Group (Mark Wilkerson) and who was very helpful in the development of the VEBA in Montana. Senate Bill 51 was drafted and passed during the 2001 Legislative session and codified in April of 2001 to MCA 2-18-1301.

What IS a VEBA 100% tax-free medical savings account Funded with tax-free employer $$’s For public service employees in Montana Cities, Counties Public Schools (K-12) MT University System All State Employees You can think of this MT VEBA HRA as a blending of a Flexible Spending plan and a Deferred Compensation Plan It is available to employees of Cities, Counties, K-12 Entities and the University system as well as all State of Montana Employees

Why VEBA Intention is to assist with creation of a supplemental medical fund for use after separation/retirement Avoid taxes on compensation – 100%! Pre-65 average retiree medical cost - $10,000/yr on Premiums Average Medicare retiree medical cost - $6,000/yr on Premiums IRS rules require us to administer the plan in specified measures which call for “group” participation. As mentioned before the intention was to provide a break with the funding of Healthcare costs and Medical Premiums for retirees. This option avoids 100% taxes on the contribution. Review basic Premium costs for pre-retirees (>65) and Medicare age folks. Read through. Discuss that the 3rd and 4th bullets are Medical PREMIUM costs only and may be low estimates. Good spot to ask what local premiums are in this area.

How to use VEBA? You may pay for medical out of pocket expenses related to Medical, Dental, Prescription Drugs, Vision benefits as well as many over-the-counter items. VEBA also allows you to pay for your Insurance premiums which include; Health - Medical, Dental & Vision Long-Term Care, and Medicare B

How is VEBA offered? Your Employer may decide how to offer the VEBA. Active Contributions vs. Separation only Employees may request the benefit by 25% of eligible group

Current Groups There are 85 State of Montana groups - Range from small bureaus to full agencies University System has 4 Groups. 8 County Groups Other Counties and Cities have had varied levels of interest and have formed groups. Many of the K-12 Entities have formed groups (Great Falls, Missoula, Lolo, Savage)

100% tax free! What’s in it for YOU? Tax free contributions Tax free earnings Tax free withdrawals

$10,000 – NO VEBA $10,000 benefit available 27% Federal income tax 7.65% FICA 8% State income tax $ 10,000 Benefit 4,265 Taxes __________________ - $ 5,735 Cash Payout Discuss the same scenario with OUT taxes.

$10,000 – WITH VEBA $10,000 benefit available 27% Federal income tax 7.65% FICA 8% State income tax Benefit $ 10,000 Taxes __________________ - $ 10,000 MT VEBA Discuss the same scenario with OUT taxes.

$5,735 $10,000 Tax Savings Montana VEBA HRA saves $4,265 in taxes!!! CASH $10,000 MSA VEBA Montana VEBA HRA saves $4,265 in taxes!!!

Tax Reporting Not required! No W-2 to employee No 1099 on earnings or withdrawals No 1040 tax return reporting No state return reporting No employer tax reporting

How long will $$ last? Buying medical insurance @ $650 per month earning 5% each year: $20,000 2.5 years $30,000 3.9 years $40,000 5.0 years $50,000 6.1 years

What is Death Benefit? Surviving spouse, dependents or heirs can continue to use account for their medical expenses and premiums If no will, then follow Montana Laws of Intestacy Money only can be used for Qualified Medical Expenses If no spouse or dependents, then reverts back to plan.

Impact on Social Security? Your Social Security Benefit is calculated on lifetime of earnings. Calculation made late in salary career. Tax-free portion of VEBA payout also late in career. VERY minimal impact to benefit amount.

Administrative Cost Low monthly policy fee of $5/mo. All other costs are paid from investment earnings – 1 ¾ % annualized. Some members’ investment choices pay for monthly costs.

What IS a Group? Union or non-union employee groups Recommend using existing group boundaries All or none decision – ballot process Vote may be taken annually Contribution Source-Agree before vote! PERS HAC Discussion

www.montanaveba.org

Summary Put the pieces in place! Agree on Contri-bution Check with PERS for YOUR impact! Decide on your Group! Do Research! Review the website VOTE when you see a ballot! Group vote is for “1” year Ask Questions!!

Health Reimbursement Account Who to contact Your Payroll Staff Melanie Denning, 444-3745 mdenning@mt.gov www.montanaveba.org VEBA Montana Health Reimbursement Account