By: Jeff Chang
Previously, we wrote about the uses of health reimbursement arrangements and the IRS rules that apply to them. As we explained, an HRA is basically an employer-funded account that may be used for paying specified medical and health costs (including health insurance premiums). Due to the enactment of the Affordable Care Act and its treatment of HRAs under the group health plan rules, HRAs covering active employees are now much harder to establish and maintain. These ACA rules, however, do not apply to retiree-only HRAs. Retiree-only HRAs can provide significant tax-free health benefits and, if structured properly, can help public employers address budgetary and compliance problems under Fair Labor Standards Act and Public Employees’ Medical & Hospital Care Act. As a result, many agencies are revisiting the utility of these arrangements as part of their collective bargaining and budgeting processes.
Here’s what we are seeing:
- Agencies are realizing that their current PTO cash-out policies are creating tax problems for them and their employees. An RHRA can be used to automatically and, on a mandatory basis, convert some or all of the accumulated PTO into nontaxable retiree health benefits.
- Agencies that wish to eliminate or cut back their FLSA/overtime exposure can offer RHRA contributions in place of current cash-in-lieu benefits. Due to rules that restrict HRA contributions to employer contributions and prohibit the use of employee “elective contributions,” agencies wishing to do this type of substitution will need to obtain appropriate tax advice on how this might be accomplished. We think a private letter ruling probably should be obtained. Also, it may become necessary to set up the RHRA as a separate custodial account or trust to satisfy the FLSA exemption requirements.
- A significant number of agencies participating in CalPERS health insurance have looked at the use of an RHRA as a way to reduce their OPEB obligations even while complying with PEMHCA’s equal contribution rule. For more on this see Chapter 12.
- We have previously written on several occasions that most California public employers have greater latitude than they realize to make changes to their retiree health benefits (and the related unfunded liabilities that go along with them). The most important aspect of these types of changes is that employers can convert what would otherwise be defined benefit-type retiree health benefits (e.g., the cost of employee and dependent health insurance coverage) into a much more affordable and predictable defined contribution commitment (e.g., contributing a specified percentage of salary during employment into an RHRA).
- There are a number of ways to establish and maintain an RHRA. Some public agencies contract with providers that offer the necessary plan documents, as well as administrative and recordkeeping support. While these “off the shelf” arrangements can save significant time and money, make sure that the one you select is appropriate for your agency and your employees. We are often asked to review these arrangements – sometimes what is offered will simply not work for that employer.
The bottom line is that an RHRA is one form of employer-provided benefit that can be used to replace currently provided benefits that create tax or overtime issues, or can be used to control and/or eliminate certain OPEB liabilities. For those reasons, among others, RHRAs are getting a closer look.
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.