Traditionally, public sector employers have generously provided some type of employer-paid health insurance benefit for their early retirees (under age 65) as a way to bridge the gap between early retirement and Medicare eligibility.  In a time when health insurance was reasonably affordable, it was common to offer what is known as a “defined benefit” plan, in which an employer promises a specific benefit (such as health insurance) over a specific time period.

The Issue

Unfortunately, with premiums rising and budgets being strained, it may be challenging for schools, cities, and counties to plan effectively for the retirement health benefits awarded to former employees now in retirement, or for the health benefits promised to current employees as they retire.  Yearly expenditures to fund these benefits become a tremendous liability, draining budgets and forcing schools to deflect money away from classroom instruction and municipalities to reduce spending on needed services and infrastructure.

The Solution

Employers are now realizing they need to reconsider the benefits packages they offer in an effort to contain costs and long-term financial obligation, yet still provide an impactful retirement benefit to their employees.  A Defined Contribution Retirement Plan may be the solution.   Contrary to a defined benefit plan which provides a distinct benefit over time, no matter the cost, the defined contribution plan allocates a specific contribution toward that benefit.  The contribution is not tied to rising insurance costs, which makes cash flows more predictable, and results in the reduction, or even elimination of, OPEB (Other Post-Employment Benefits) liability.

How a Health Reimbursement Arrangement Can Help

One of the most ideal funding options for a defined contribution plan is a Health Reimbursement Arrangement, or HRA.  The HRA account is designed to reimburse employees for their eligible medical expenses to offset their out-of-pocket costs. The employer regularly deposits funds into individual accounts on behalf of employees while they are employed. These funds, with earnings, are free from federal income and FICA taxes, and can be used at any time, upon eligibility.  To be eligible to use the funds, the participant must have either separated from service or retired.  Participants are 100% vested immediately, meaning that they own the account balance as soon as the account is established.

Migrating an employer’s benefit plan design from a defined benefit to a Defined Contribution HRA will enable that employer to reduce existing liability and minimize future costs, all while keeping its promise to employees and freeing up resources to better serve students, citizens, and the community.  A dedicated solutions partner can furnish an HRA plan that will provide a seamless transition for employees entering the retirement phase of their lives, and ensure they receive the most appropriate benefit, even while healthcare costs continue to rise.

Trusts & HRAs

In conjunction with an HRA program, employers may consider establishing a Post-Employment Benefit Trust as a vehicle to pre-fund employee and retirement benefits.  A trust enables the employer to set aside funds while the employee is still actively employed in order to minimize, or even eliminate, the liability later on.  Funding through a trust reduces what can be a substantial liability on the financial statement.  The trust is a legal entity and trust funds are safe from the employer’s creditors.  If you’d like to learn how HRAs and trusts can help you achieve your financial goals, contact us today at [email protected].

MidAmerica Administrative & Retirement Solutions has been providing retirement solutions since 1995, and health and welfare programs since 2002.  Our goal is to maximize benefit dollars for both the employer and the employees.  Our staff of highly experienced subject matter experts, ease of technology, and streamlined administration enable us to reach this goal.  Please contact us if you’d like assistance in reaching your goals.