Introduction to Health

Reimbursement Arrangements

“HRAs”

City of Sarasota

Presented by:Mark R. Wilkerson, CFPHRA ConsultantDecember 1, 2004

TopicsTopics

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

HRA Service TeamHRA Service Team

Combining:

AIG VALIC - education and enrollment expertise and resources

HRA Consultants - HRA experience

Rehn & Associates, Inc. - HRA third party administration experience

AIG VALICAIG VALIC

Education Services

Enrollment Services

Special Pay Plan Companion

HRA Consultants, a Division of VSGHRA 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.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)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 AgeYour Projected Total Cost

@ 5% Increases

60 $247,893

55 $316,381

50 $403,791

45 $515,351

40 $657,733

Monthly Growth ExampleMonthly 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

$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

$40,000 With HRA Contribution

$ 40,000 Benefit

- 0 Taxes

$ 40,000 HRA Balance

$40,000 benefit available

HRA BasicsHRA 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

Revenue Ruling 2002-41, HRAs

Revenue Ruling 2004-45 – Coordinating HSAs, HRAs, & FSAs

Employee/ParticipantEmployee/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

Employee/Participant (cont.)Employee/Participant (cont.)

Disadvantages

Limited to medical only

Group contributions and decision process

EmployerEmployer

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.)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?Who’s expenses are eligible?

Employee/retiree

Spouse

Qualified dependents

Qualified Insurance PremiumsQualified Insurance Premiums

Medical

Dental

Vision

Long-term care (tax-qualified)

Medicare Part B

Medicare supplements

Qualified ExpensesQualified 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 StructuresTrust 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

Trust Structures (cont.)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 ProcessAdoption 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 ProcessAdoption Implementation and Ongoing Administrative Process

Turnkey Plan – Services Provided New employee education

Enrollment

Participant service

Claims

Account statements

Website

COBRA Compliance

HIPAA Compliance

Audit/Tax forms filed

Contribution RequirementsContribution 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 SourcesEmployer 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!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 DesignsAggressive 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)622-6080

VALIC National HRA PlanVALIC 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