By: Jeff Chang
Sometimes the realities of family budgets – budgets in general – collide with notions of fairness and equal treatment. I can still remember the deep disappointment in the eyes of our youngest child many years ago when we explained that the family would not be purchasing another car when she got her driver’s license, even though we had purchased one when her oldest brother had received his. Today, many of California’s cities and public agencies are faced with a similar dilemma due to the expectations of their employees and their past practices. If, however, a municipality or public agency decides that its budgetary constraints must override its equal treatment of employees, there are a number of ways to make adjustments to benefit levels – even when it comes to health insurance benefits offered through CalPERS.
Hundreds of California’s public employers and approximately 1.3 million public employees, retirees and their families participate in the health insurance program offered by CalPERS. This makes CalPERS the third largest purchaser of health care in the nation. Participation in the CalPERS health insurance program is separate from participation in the CalPERS retirement program.
To take advantage of the purchasing power and administrative structure of the CalPERS health insurance program, California public employers must apply to CalPERS and agree by resolution to become subject to the Public Employees’ Medical and Hospital Care Act (PEMHCA). One of the requirements of the PEMHCA – one which can potentially cost a public agency a considerable amount of money – is the so-called “equal contribution rule.” The equal contribution rule generally requires a PEMHCA employer to pay the same amount toward health insurance premiums for its retirees as it does for its active employees. In other words, by agreeing to participate in the CalPERS health insurance program, an employer is creating a built-in retiree health insurance benefit!
The PEMHCA provides that the employer’s equal contribution rate be at least as much as the so-called “PEMHCA minimum.” This is $119 per month for 2014 and is subject to annual adjustment.
Fortunately, the equal contribution rule does not require an employer to pay for the most expensive health insurance coverage for its employees and retirees. The level of employer-paid premium is usually determined by labor negotiation or is a matter of historical practice and budget. So, for example, if an employer has agreed with its active employees to pay the cost of health insurance premiums up to the cost of the most expensive HMO option, it likely will find itself paying the same amount towards its retiree health insurance premiums.
One way for a PEMHCA employer to potentially save money is to lower its equal contribution commitment for both actives and retirees to the PEMHCA minimum and then separately subsidize actives’ and retirees’ health care premiums through the use of cafeteria plans or health reimbursement arrangements (HRAs). In this way, an employer can differentiate between the treatment of active employees and retirees. It also can differentiate within its active employee and retiree groups by providing differing levels of subsidies through cafeteria plans or HRAs. This practice of moving to the PEMHCA minimum and providing “outside-of-CalPERS” subsidies is becoming increasingly widespread.
There is, of course, another technique that when used independently of or in conjunction with the one just described can give employers even more control over the health benefits provided and their benefits budgets. We call this technique the “rate group” method. To take advantage of this, a PEMHCA employer simply files with CalPERS a new PEMHCA equal contribution resolution that specifies that it is dividing its employees into various coverage groups – each with its own equal contribution rate. For example, the new resolution could specify that all collectively-bargained employees will receive one level of employer-paid premium while all unrepresented employees will receive a different level. Again, under the equal contribution rule, retirees within a designated group must receive that same level of employer-paid premium as their active counterparts; but now we have two rate groups rather than one.
Currently, CalPERS’ rules governing the designation of such groups are quite flexible. For example, it is our understanding that CalPERS will permit:
- groups that are not limited to designated bargaining units;
- multiple groups within the larger unrepresented population of an employer’s employees; and
- groups defined by reference to a date of hire or a date in an MOU.
The ability to break employer health premium subsidies into various groups of actives and retirees seems to make working within the constraints of the equal contribution rule much more palatable. It also can pave the way for considerable cost savings, both with respect to employer obligations for active employees and for retirees. Finally, it would make the design and operation of the “outside-of-CalPERS” subsidies under cafeteria plans and HRAs somewhat simpler.
Because the rules relating to the use of the rate group method are not all that obvious or explicit, employers should utilize this approach only with full disclosure to CalPERS and its acknowledgment of the practice.
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 firstname.lastname@example.org or (916) 329-3685.