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
  • Employer-funded
  • 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.

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Accumulated Leave Case Study Download

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