Tightening Budgets, Layoffs and Ongoing Labor Negotiations Highlight the Value of Retiree Health Reimbursement Arrangements

Given the current circumstances, many public agencies are finding ways to use health reimbursement arrangements as creative and cost-effective benefits for their employees and former employees. As explained in earlier posts, HRAs possess a number of important and valuable features.

Most importantly, the payment or reimbursement of qualifying medical expenses from an HRA are tax-free to the participant. HRAs can be used for active employees or can be used to provide retiree health benefits. And, while HRAs must be employer-funded, there are ways to “convert” other employer obligations into tax-free HRA benefits.

Here are a few recent examples:

  • A city was forced to lay off a number of workers due to the COVID-19 crises. Because the affected workers were not yet retirement eligible and the city wanted to “soften” the impacts of the layoffs, it adopted an HRA to provide tax-free COBRA premium relief to the laid-off workers. The city’s commitment was designed as a fixed-dollar amount per affected worker with the benefit expiring once the fixed amount was depleted.
  • A city and its police union have been renegotiating their MOU. Now that they understand the tax problems and risks associated with allowing cash-outs of significant accrued vacation, they are looking for ways to address the officers’ accrued vacation, which no longer may be electively cashed-out. One very promising option is to agree to a “conversion” of certain amounts of accrued vacation into an HRA contribution for affected officers made by the city. As mentioned in our earlier posts about this, the result is a conversion of something that will be taxed (vacation) into something that will be tax-free (HRA reimbursements).
  • Despite tightening budgets, some agencies still need to recruit and retain skilled and highly educated workers. One agency has found that its recruitment of such workers is improved when it can offer certain amounts of retiree health benefits to its mid-career hires. Because HRAs can be structured to operate on a defined contribution basis, so that the benefits equal the sum of the employer contributions (and any earnings), the agency can decide how much it can afford to “spend” on such benefits.
  • Public agencies that participate in CalPERS health and, as a result, comply with the equal contribution requirement of PEMHCA are lowering their retiree health benefit obligations by using a retiree HRA (on a defined contribution basis) rather than guaranteeing the payment of future premiums.

Jeff Chang is a partner at Best Best & Krieger LLP. He has four decades of experience skillfully evaluating benefit and retirement plan compliance to achieve maximum outcomes for public agency clients throughout California. He can be reached at jeff.chang@bbklaw.com or (916) 329-3685.

 

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