It’s that time of year again! Open enrollment is the yearly period when employees can enroll in a health insurance plan and voluntary benefit funding plans like Flexible Spending Accounts (FSA) and Health Savings Accounts (HSA). For employers, it is a time of year that serves as an opportunity to help their employees navigate through decisions that will significantly impact them and their families. It’s important that this period goes smoothly so that employees make the right choices for their unique situation. To that end, here are some tried-and-true tips to make the most of this crucial time.
Start Education Early
The annual benefits election process should start well before any forms are filled out. The earlier you can get information and materials out to your employees, the better. This allows time for employees to review their options and formulate any questions before enrollment begins. Plan to answer some of the most common open enrollment questions for each program, such as:
- Why do I need this benefit?
- Which features fit my needs?
- What value does the program provide?
- How much is this going to cost me per paycheck?
If you offer an FSA through MidAmerica, we have several open enrollment and benefit education resources you can leverage. Simply reach out to your Account Manager!
Remember the Basics
Many employees don’t fully understand health insurance or benefit funding plan basics. With health insurance options changing, employees may need education on definitions and examples of co-payments, deductibles, co-insurance, and out-of-pocket maximums. Avoid using confusing jargon in your marketing collateral so that solutions are easy to understand.
Communicate Your Plan and Level of Coverage
Prepare to share information about your company’s benefits coverage and health benefit funding plans, including the different plans that you offer and their respective coverage, and any changes you are making or considering. Be sure to clearly communicate cost information so employees understand what they will need to pay and how their benefit is changing. Prepare handouts outlining the major changes to the benefits, including new IRS guidelines and plan maximums, and hold informational meetings. Anticipate questions and have FAQs ready for distribution.
Avoid Information Overload
Some employers make the mistake of handing out pages and pages of text, jamming a year’s worth of communication into a few weeks. Instead, communicate the technical details of your various benefits over time. Don’t assume employees will weed through all your materials to make sense of the benefits offered to them.
Give Employees a Generous Time Frame
While many people may wait until the last minute to fill out their forms, others consider their options with their family members for weeks. Giving them just a few days will not be enough. Be sure to build in a time frame that gives HR staff and employees the time they need. A recommended time frame is three weeks.
Although open enrollment can seem like a stressful time, it doesn’t have to be that way. By following the tips above, you can ensure that your organization has a successful open enrollment.
One of the most prevalent headlines in the news these days is the shortage of public school teachers around the country. According to the Bureau of Labor Statistics, there are at least 280,000 fewer public school teachers than there were before the pandemic.¹ While this shortage of educators was emerging before COVID-19 changed life as we knew it, the pandemic and the ensuing Great Resignation of 2021 exacerbated the problem. Now, as the 2022-2023 school year begins, the deficit has only gotten worse and has expanded to include positions such as bus drivers, custodians, school nurses, and cafeteria workers.
In fact, a survey² sponsored by EdWeek Research Center—the research arm of the non-profit and non-partisan publisher of Education Week—confirmed that most schools are seeing fewer candidates for critical positions during the same period last year. More than 2/3 of survey respondents said they do not have enough candidates to fill teacher, paraprofessional (e.g., teacher assistants, teacher aides), and food service worker positions, and 86% said they don’t have enough bus driver candidates.
Addressing the Issue
While attrition and recruitment issues can occur for many reasons—some of which are beyond the control of school administrators—it’s hard to deny that benefits such as health insurance and retirement plans are every bit as important as salary when an employee is deciding whether to stay or go, or when a candidate is wondering if they should accept a position in the first place. It’s critical that decision makers start thinking creatively when it comes to “bulking up” benefits packages—especially amid budgetary constraints. Fortunately, there are some unique plan designs that can help attract and retain talent in a budget-friendly way.
A Triple Tax-Free Defined Contribution Benefit—For Health Care
In these inflationary times, the cost of everything is going up, and health care is no exception. Helping employees offset the rising cost of medical expenses or bridge the gap between retirement and Medicare eligibility could be just the incentive needed to make your benefits package competitive.
Enter the Defined Contribution Health Reimbursement Arrangement (dcHRA). A triple tax-free way to pay for eligible medical expenses upon retirement or separation from service, the dcHRA is funded by the employer while the employee is actively working—so the employee can see the contributions they’re receiving. Here are some other key features of the dcHRA that make it a win-win for both employees and employers:
- Funds are invested for potential tax-free growth.
- Depending on plan design, the dcHRA can help offset costs like prescriptions, eyeglasses, doctor visits, and premiums completely tax-free.
- Funds can be used by the participant, their spouse, and any eligible dependent once the employee becomes claims eligible.
- Plan factors such as vesting schedules can be applied to persuade employees to remain with the district until they are fully vested in their benefit.
- Both the employer and the employee permanently save 7.65% on FICA taxes.
- Plan can be funded using unique forms of compensation like unused accumulated leave, maximizing already earmarked funds.
Maximizing Accumulated Leave to Offer a Tax-Advantaged Retirement Plan—the Special Pay Plan
Similar to the dcHRA, the Special Pay Plan, which is a type of 401(a), 403(b), or 457(b) retirement account, can be funded using unique forms of compensation, such as unused sick leave and unused vacation pay. The benefit can be used—tax-deferred—for whatever purpose a participant chooses once they retire or separate from service. Here’s a closer look at what makes the Special Pay Plan a winning addition to any benefits package:
- Contributions into the retiree’s plan can be based on years of service and severance.
- Contributions are made pre-tax, which means the retiree receives the full, untaxed value of their unused compensation.
- Income tax is deferred until a withdrawal is made.
- Funds are invested with the potential to grow tax-deferred, which means increased value due to earnings over time, further maximizing the benefit.
- Both the employer and employee permanently save 7.65% in FICA taxes.
The best part of a Special Pay Plan is how seamlessly it works alongside the HRA. Plan sponsors can create a unique plan by diverting a portion of the employee’s unused accumulated leave into the HRA to cover medical expenses and a portion into the Special Pay Plan to be used for any purpose once the employee retires. To learn more about how the Special Pay Plan and HRA work together, click here.
A Powerful Retirement Benefit for Part-Time, Seasonal, and Temporary Workers—the FICA Alternative Plan
The need for workers in our schools is not limited to full-time positions. There’s a high degree of availability for jobs categorized as “part-time, seasonal, and temporary”, which includes substitute teachers, cafeteria workers, and school bus drivers. Many employers have difficulty providing meaningful benefits for this population of the workforce. Fortunately, there is an IRS-approved retirement benefit designed specifically for this category of workers—the FICA Alternative Plan. Designed to be an alternative to Social Security under Section 3121 of the Internal Revenue Code, the FICA Alternative Plan* places 7.5% of an employee’s pre-tax wages into the plan, resulting in a contribution nearly equal to the 6.2% they would have otherwise paid to Social Security. While it may appear to be an increase in the employee’s contribution, that employee is actually left with close to the same take-home pay—because of the pre-tax scenario. The funds are invested in an interest-bearing account with the potential to grow over time, and the account balance—with earnings—is tax-deferred until distribution.
From the employer’s standpoint, they are able to avoid the matching 6.2% Social Security contribution, replacing it with an impactful benefit for their employees and reducing the stress on their own budgets.
Attracting and retaining talented school employees has probably never been as challenging as it is right now—and there is no single remedy to alleviate this crisis. However, there are tax-advantaged vehicles employers can incorporate into their benefits landscape that will not only garner significant payroll tax savings for their organization as well as their employees but will also appeal to candidates who understand the importance of preparing for their financial futures.
Want to learn how our creative solutions can protect you against unwanted attrition while attracting new talent? Complete the form below!
*The FICA Alternative Plan may not be permitted in all states.
Learn more about our solutions!
A Health Reimbursement Arrangement (HRA) is a powerful solution that allows plan participants to pay tax-free for medical expenses that are determined by the Internal Revenue Service (IRS) and the employer. Knowing the ins and outs of which medical expenses are eligible for reimbursement may seem tricky, but it doesn’t have to be. With the right tools and information, you can get the most out of your HRA and avoid paying for expenses that you believed were reimbursable.
Things To Keep In Mind
- Eligible expenses can vary depending on your plan’s unique design.
- Although the expense may be considered eligible by the IRS, the employer can actually determine from that list which are eligible under the plan.
- MidAmerica does not determine which expenses are eligible and which ones are not. These guidelines are set forth by the IRS and employer, and MidAmerica abides by these standards to maintain your plan’s compliance.
It’s not uncommon for MidAmerica to receive claims that must be denied because they do not meet the qualifications set forth by the IRS and employer. To help you better understand which expenses are ineligible, continue reading to see commonly submitted claims that are denied.
- Everyday Health Items – Unless participants can receive a doctor’s note, general health items such as toothpaste, suntan lotion and vitamins are not reimbursable. This is because they are considered items that would be used regardless of any medical condition. However, sunscreen (which has a higher SPF than suntan lotion) and some supplements may be eligible for reimbursement. Be sure to review your plan highlights to confirm if the expense is available for reimbursement. If your plan is on MidAmerica Journey, you can also submit a claim through the Journey portal to gain access to a list of expenses that are eligible.
- Warranties or Funeral Expenses – Although warranties or funeral expenses can be associated with the result of a medical expense, they themselves do not qualify and are not reimbursable.
- Dental and Vision Discount Programs – Discount programs are made to help participants with the cost of medical expenses. But since enrollment in the program itself is not medically necessary, that expense is not reimbursable. When participants do utilize these programs, MidAmerica carefully reviews the itemized doctor’s bill and only reimburses the out-of-pocket portion of the medical service, excluding the price of the discount program.
Understanding expense eligibility may sometimes seem complicated, but we’re here to help you navigate the guidelines. If you would like to see a complete list of eligible and ineligible expenses, click here to view IRS Publication 502. We also encourage you to visit our Resources page to download additional HRA tools and information. To obtain a copy of your Plan Highlights, log into your online portal.
If you feel that the world of health savings can be a bit confusing, you’re not alone. At MidAmerica, we oftentimes are asked to help clients decipher the differences between account acronyms, which can certainly be confusing to the untrained eye. Two commonly confused benefits are Health Reimbursement Arrangements (HRAs) and Health Savings Accounts (HSAs). But how do these accounts differ? What about them is similar? Continue reading for further insight.
Health Savings Account (HSA)
An HSA is a personal bank account to help employees save and pay for qualified medical expenses. In order to contribute to an HSA, you must be enrolled in a high-deductible health plan (HDHP) that meets a deductible amount set by the Internal Revenue Service (IRS). The HSA is a voluntary benefit of which employees can choose to participate (or not to participate). HSAs can be funded by the employee, the employer or any combination of the two. While HSAs help offset the cost of an HDHP, they come with maximum contribution limits and restrictions on eligible reimbursements.
Health Reimbursement Arrangement (HRA)
Unlike an HSA, an HRA does not require enrollment in an HDHP and is overall a bit more flexible with its administration. If the employer offers an HRA, enrollment is automatic and requires no action from the employee. Employers are the only allowed contributor for HRAs and can determine the amount and frequency of the contribution. HRAs have no maximum contribution limits and can allow for reimbursement of health insurance premiums upon retirement.
HSAs and HRAs: A Comparison
HSAs and HRAs have a lot in common, but also have key differences that should be highlighted. The comparison chart below illustrates the most notable similarities and differences between the two benefits.
|100% tax-free contributions, reimbursements and interest accrual.
|100% tax-free contributions, reimbursements and interest accrual.
|HRAs cover medical expenses that are determined by the IRS & the employer. The employer may decide to only allow the HRA to pay for services covered by your health plan. Some HRAs can be used to pay for dental, vision, & other services/supplies listed under Section 213(d) of the Internal Revenue Code.
|HSAs cover qualified medical expenses, including services covered by a health plan as well as expenses listed under Section 213(d) of the Internal Revenue Code.
|Employer can contribute (Participant can still contribute to a full medical FSA).
|Participant and Employer can contribute (Participant can only use FSA for dental and vision expenses).
|All participants and retirees can participate.
|Some participants are not eligible to participate.
|Integration with FSA
|The HRA allows the employee to have a health care FSA and/or dependent care FSA.
|HSAs permit the employee to have a limited purpose FSA which can only be used for eligible dental and vision services.
|100% of funds can roll over each year or the employer can designate a certain rollover amount and share in a portion of the unused funds.
|Funds can roll over each year. The employer cannot share in a portion of unused funds.
|HRAs can be invested for potential growth.
|HSAs can be invested for potential growth.
|Can be used with any type of health insurance plan design.
|Can only be used with an IRS-qualified High-Deductible Health Plan (HDHP) whose limits are set by the IRS.
Gaining clarity with key terms is very important when planning your benefits. If you ever struggle with understanding the difference or similarities between different plan types, MidAmerica is always here to help. To learn more about HRAs and HSAs, you can download our comparison chart by completing the form below.
Download the full HRA/HSA Comparison Chart!
Bridging the Gap
Paying for health insurance premiums is often the top concern for hardworking employees considering retirement. Unfortunately, they’re likely to postpone their retirement dreams due to uncertainty around how they’ll be able to afford it. As the cost of health care continues to rise, so do concerns about accessibility of benefit funds and affordability of health insurance—more specifically, how employers can help employees bridge the gap between retirement and Medicare eligibility.
Using existing accumulated leave payouts more efficiently can empower you as the employer to help employees navigate their post-retirement financial situations. Alleviating pre-retirement concerns employees may have about paying for health care can enhance your overall benefit package and help employees retire with peace of mind.
Fortunately, building that bridge isn’t as complicated or expensive as employers may think. All it takes is looking at accumulated leave a little bit differently.
Understanding the Options
Public sector employers are likely familiar with offering employees a tax-deferred retirement plan, such as a Special Pay Plan (SPP). While these plans do provide a valuable benefit to retirees, they’re not designed to pay for medical expenses in the most cost-effective manner. Now let’s consider a not-so-familiar option, one that uses accumulated leave specifically for health care expenses—the Retiree Health Reimbursement Arrangement (rHRA).
An HRA can use an existing pool of accumulated leave and transform it into a tax-free vehicle to pay for eligible medical expenses, including health insurance premiums. As with a traditional retirement plan, the rHRA is invested for potential growth and can be used in conjunction with a Special Pay Plan, not instead of. Let’s see how the HRA stacks up.
Type of Funding
Access to Funds
Use of Funds
- Earns interest tax-free
- Tax-free reimbursements
- No early withdrawal penalties
- Accumulated leave can be used
|Access to funds immediately upon retirement / separation of service
|Used to pay for eligible medical expenses, including premiums
How to Maximize Accumulated Leave
Let’s imagine how a retiring employee can benefit from a Special Pay Plan / HRA combination. Under this scenario, an individual that has accrued $25,000 in accumulated leave would have his or her funds split evenly between the Special Pay Plan and the Health Reimbursement Arrangement, creating two buckets of tax-advantaged retirement funds. The employee gets a familiar retirement benefit that can be used for any purpose, as well as a tax-free way to pay for health care costs in retirement. Best of all for employers, this enhanced retirement benefit for this particular individual is already budgeted—there is no additional cost to provide it!
Here’s how this individual’s accumulated leave is maximized:
Special Pay Plan
- 50% ($12,500) contributed to the rHRA tax-free
- Employee saves roughly 27.65% in Federal and FICA taxes (which would have been applied to her accrued leave payout)
- Employee can use the funds to pay for retiree health insurance tax-free
- 50% ($12,500) contributed to the Special Pay Plan tax-deferred
- Employee saves 7.65% in FICA taxes (which would have been applied to her accrued leave payout)
- Employee defers Federal taxes (that would have been applied to her cash payout) until she withdraws the funds upon age eligibility, when she’ll likely be in a lower tax bracket
When a Special Pay Plan and an HRA are paired together, the retiring employee is the recipient of a winning combination. The two vehicles work in concert to accomplish the following:
- Accumulated leave can be used to fund both the Special Pay Plan and rHRA
- rHRA funds can pay for medical insurance premiums (group or individual), dental and vision insurance premiums, and other out-of-pocket medical expenses—completely tax-free
- Special Pay Plan funds can be used for any purpose once age and eligibility requirements are met
- rHRA helps bridge the gap between retirement and Medicare/Medicare Supplements
- Both plans can be invested in fixed and variable accounts for potential growth
Need Help Reimagining Accumulated Leave?
Tackling a unique public sector benefit challenge may be as simple as looking at accumulated leave differently. By using funds that have already been earmarked for payout, employees save in FICA taxes, receive a tax-free way to bridge the gap between retirement and Medicare eligibility, and still retain a bucket of post-retirement funds that can be used for any purpose. Employers continue to save on FICA taxes while enhancing their benefits package without the burden of adding to the organization’s budget.
Complete the form below to download the case study!
Accumulated Leave Case Study Download
MidAmerica’s 3121 FICA Alternative Plan is a unique retirement benefit specifically designed for part-time, seasonal, and temporary employees. Known as the APPLE plan to our Californian clients, the FICA Alternative Plan replaces Social Security, creating a powerful retirement benefit that has the potential to grow over time. If you’re a participant and are new to your FICA Alternative Plan, or simply need some quick reminders, we’ve outlined the need-to-know details of this valuable benefit below.
What is a 3121 FICA Alternative Plan?
A FICA Alternative retirement plan is an interest-bearing account that replaces Social Security for part-time, seasonal, and temporary employees. The plan is a type of 3121 retirement plan which substitutes the Social Security portion of the FICA tax requirement with a pre-tax contribution to a FICA Alternative account. Essentially, the benefit not only enables significant tax savings for both the employer and the employee, but allows the account to potentially grow over time through investments. Best of all, MidAmerica assures peace of mind when it comes to the administration of your hard-earned funds through our PeopleFirst customer service philosophy and more than 25 years of experience. In fact, the FICA Alternative plan was MidAmerica’s first-ever plan introduced at our founding in 1995!
How does it work?
Once you become a plan participant, the FICA Alternative retirement plan immediately replaces the 6.2% Social Security tax on payroll with a 7.5% pre-tax contribution to your account. Even though the contribution to the benefit increases to 7.5%, your net paycheck remains virtually unchanged due to the pre-tax nature of the contribution. To understand how a 6.2% tax and a 7.5% contribution can have the same effect on your paycheck, please see the graph below.
How 7.5% Equals 6.2%
Employer after-tax Social Security contributions of 6.2% are replaced with pre-tax employee contributions of 7.5% into a FICA Alternative retirement plan, to potentially grow over time. This actually leaves employees with around the same take-home pay as contributing to Social Security would. Why? Because FICA Alternative Plan contributions are pre-tax.
|FICA Alternative Retirement Plan
|Less 7.5% contribution into retirement plan
|Less 15% Income Tax
|Less 6.2% Social Security
|Less 1.45% Medicare
Furthermore, your employer permanently saves the matching 6.2% FICA tax which adds to your organization’s budget, freeing up funds to potentially use for needed projects or initiatives. Finally, with MidAmerica, your FICA Alternative plan is invested for potential growth over time with a minimum guaranteed annual rate of return. As a participant, you may also, depending upon plan design, have the freedom to self-direct the investment of your funds to meet personal retirement goals.
When can I access my funds?
You are immediately vested in your FICA Alternative plan (which means you fully own your account) upon retirement, separation of employment, or transfer to full-time employment from a part-time, seasonal or temporary status. Once you are vested (and deemed eligible according to IRS age requirements), you are able to withdraw your retirement funds or roll over your account to a different retirement benefit. Please note certain waiting periods may apply, depending on your unique plan design. To learn more about your unique plan, review your employer’s Plan Highlights.
Understanding the IRS Rules
IRS rules state that participants achieve penalty-free access to their funds when they reach certain age requirements based on the underlying Internal Revenue Code (IRC) section for the unique plan. Under law, regardless of the IRC section, participants are obligated to withdraw a certain percentage of their funds each year after reaching age 72. To learn more about the IRS age requirements for your plan, review your employer’s Plan Highlights.
If you still have questions about your 3121 FICA Alternative Plan or need additional resources, MidAmerica’s Participant Services (PSR) team is here to help. We provide nationwide coverage for participant education, ensuring you understand how to manage and access your benefit. In addition to our service team, you always have access to your benefit online by selecting Access Account from the top right-hand corner of the website.*
The PSR team is happy to answer any questions at (800) 430-7999 Monday through Thursday from 8:30 a.m.-8:00 p.m. ET and Friday from 8:30 a.m.–6:00 p.m. ET. You can also reach us by email at [email protected].
*Please note you will not have access to your account online until MidAmerica receives your first plan contribution.
We understand that navigating the world of retirement benefits may seem like a daunting task and, as an employee, you may have some questions about the Special Pay Plan your employer has set up for you. If you’re new to the plan, or just need a refresher, we’re here to help you get the most out of this powerful benefit.
What is the Special Pay Plan?
The Special Pay Plan uses special forms of compensation (hence, “Special Pay” plan) like your unused sick leave, unused vacation pay, or early retirement incentives to fund a tax-deferred retirement benefit that’s invested for potential growth. Employers and employees alike reap considerable benefits from a Special Pay Plan, as the benefit enables tax savings for both parties and MidAmerica assures peace of mind in our handling of your hard-earned funds.
How does it work?
Once you retire or separate from service, your employer deposits your accumulated unused sick leave, vacation pay, and other forms of compensation into a 401(a) or 403(b) retirement account. Crucially, these forms of compensation enter the account pre-tax, providing you with significant savings.
To demonstrate the extent of these savings, take the instance of a participant who receives a $10,000 deposit into their Special Pay Plan. They permanently avoid the 7.65% FICA tax, saving them $765 in FICA taxes deposited into their plan. Furthermore, the employer also avoids matching the 7.65% FICA tax they are otherwise obligated to pay per IRS rules. The employer may elect to use these savings to fund organization projects or to invest these savings back into their employees.
The participant’s retirement account is income tax deferred, meaning any income taxes will be paid upon withdrawal from the account. Income tax deferral can usually provide you with even more savings, since you’ll likely fall into a lower income tax bracket further into retirement due to a reduction in your annual income (compared to when you were actively working.)
Invested for potential growth.
Finally, your Special Pay Plan is invested for potential tax-deferred growth with a minimum guaranteed annual rate of return. You may also have the freedom to self-direct the investment of your funds to meet personal retirement goals, if your plan allows.
When can I access my funds?
Participants are immediately vested in their Special Pay Plan upon retirement or separation of employment—which means you fully own the account—giving you immediate access to your funds once you retire. However, we encourage you to think of the account as a rainy day fund—a reservoir of resources accessible on a needs-first basis. The money is there when you need it but has the potential to grow tax-deferred when you don’t!
Important IRS rules to consider.
IRS rules state that participants achieve full access to their funds when they reach 59 ½ years of age. So, if you separate from employment before that age, a 10% tax fee will be imposed on your distribution. If you are over the age of 59 ½ when you separate from employment, you will have full access to your 401(a) or 403(b) account and are, in fact, obligated to withdraw a certain percentage of your funds after the age of 72.
We’re here to help.
If you still have questions about your Special Pay Plan or need additional resources, MidAmerica’s Participant Services team is here to help. We provide nationwide coverage for participant education, ensuring you understand how to manage and access your benefit. In addition to our service team, you always have access to your benefit online by selecting Access Account from the top right-hand corner of the website.*
The Participant Services team is happy to answer any questions at (855) 329-0097 Monday through Thursday from 8:30 a.m. – 8:00 p.m. ET and Friday from 8:30 a.m. – 6:00 p.m. ET. You can also reach us by email at [email protected].
*Please note you will not have access to your account online until MidAmerica receives your first plan contribution. Once the contribution has been received from your employer, we will mail you a detailed Welcome Kit with instructions on how to register for your account.