If you are contemplating retirement, one of your foremost concerns is probably the issue of medical insurance. How will you pay for it when you are no longer receiving a regular paycheck? If remaining on your employer’s medical plan is an option, this may be something to consider. However, the retiree health care benefit sponsored by your employer may be a Health Reimbursement Arrangement (HRA) rather than a full-fledged medical plan.
What is an HRA?
A Health Reimbursement Arrangement is an interest-bearing, employer-funded account created in your name. Deposits can be made completely tax-free¹, meaning that you receive 100% of the value of each benefit dollar.
The HRA account is designed to reimburse retirees for their eligible medical expenses and/or premiums to offset their out-of-pocket costs. Your employer determines which qualified medical expenses are eligible for reimbursement under the plan. Your employer may also decide to fund the HRA using your accumulated leave, such as unused sick leave, unused vacation pay, severance, or other retirement incentives.
What are my HRA Options?
There are two HRA options designed to benefit retirees: a Defined Contribution HRA or a Retiree HRA.
- With a Defined Contribution HRA, funds are deposited while you are still actively working, growing over time, and becoming available for use upon retirement or separation of service.
- With a Retiree HRA, funds are deposited in a lump sum upon retirement/separation of service. The funds are invested once deposited and can be used immediately upon deposit.
For both types of HRA, account balances roll over year to year, qualified expenses are reimbursed tax-free1, and funds can be used to reimburse eligible medical expenses incurred by you, your spouse, and any qualifying dependents.
Is an HRA really right for me?
While HRAs have been around since 2002, this type of benefit may be uncharted territory for you. One of the most common misunderstandings that retirees have about the HRA is that they’re not receiving their full benefit simply because they’re not collecting a cash payout. In reality, you would receive more money because there is no liability for FICA, Federal, or State income taxes, resulting in a “triple tax-free” benefit for you. That means deposits made into your account, any earnings on your account balance, and any reimbursements made from the account are tax-free1, ensuring that you receive dollar for dollar the benefit amount you were promised.
The HRA is a valuable vehicle for bridging the gap between retirement and Medicare eligibility. Given this financial incentive from your employer, you may consider retiring earlier than planned, and you may choose to seek an alternative health care option, rather than remaining on your employer’s plan. To learn more about the long-term benefits of an HRA solution and about what an HRA is—as well as what it’s not—click here to download our educational piece, Common HRA Misconceptions.
¹Not subject to FICA, Federal or State income taxes
Most of us look forward to the day we can retire from our jobs—maybe kick back, relax and take it easy for a change. Or, for those who can’t sit still, maybe this is a time to check off bucket list items.
No matter how you plan on spending your golden years, you’ll likely need to save some money for when it’s time to cash in. With some careful planning, you can find ways to enjoy this time—without the constant worry of finances.
5 Money-Saving Tips for the Dream-Chasing Retiree
Don’t be afraid to ask for the senior discount!
It only costs $16 a year to be a member of AARP or American Seniors Association, which will grant you access to a world of discounts. Apps like Senior Discounts Club or Flipp can help you easily discover savings at your favorite restaurants, travel, and stores like Target, Walgreens, and Walmart.
Declutter or downsize your home!
Retirement is the perfect time to take on new projects. Get rid of unwanted items in your garage or storage unit, then have a yard sale or donate it to a family in need. If your kids have moved out, look at the empty nest phase as an opportunity to start fresh with a smaller home. Consider the savings you could generate—lower property taxes, utility bills, maintenance costs and homeowner’s insurance premiums—just to name a few!
Consider donating or selling an extra vehicle.
Now that you’re no longer commuting to work, perhaps you can get by with just one car instead of two. Sell the car for extra cash or donate the vehicle to a charity. Plus, it will save you on car insurance bills, maintenance and gasoline expenses.
Keep doing what you enjoy, but less frequently.
If you’re in the habit of eating out five times a week, try cutting back to three. It’s not a dramatic change, but you will notice the savings to your wallet. Think of the other ways you could cut back. How about golfing two days a week instead of four?
Treat your Special Pay Plan or Health Reimbursement Arrangement as a rainy day fund.
If you currently have retirement benefits through MidAmerica, it makes sense to hold off on distribution or reimbursement requests until necessary. Why? Because your benefit funds are invested for potential tax-free or tax-deferred growth. This means the longer your funds stay in your account, the more money you could potentially end up with down the road. Your 403(b)/401(a) Special Pay Plan and Health Reimbursement Arrangement is there when you need it, but it has the potential to keep growing when you don’t.
These are just a few simple ways to save money as a retiree, which we hope make you realize that saving money doesn’t need to be difficult. Living the happy retirement you deserve can be as simple as sticking to your budget, keeping track of what you spend, and appraising your spending for any savings opportunities. If you have questions about financial planning or need personalized advice, please consult your financial advisor.
If you’re like most people, preparing for retirement is an exciting time. You may find yourself daydreaming about kicking back, relaxing, and taking it easy for a change. For those who can’t sit still, perhaps it’s time to start pursuing that bucket list you’ve been working on your whole life. No matter how you decide to spend your golden years, taking some steps now to ensure that you are well-prepared for what lies ahead—emotionally and financially—can help you to retire with peace of mind.
For best results, you’ll want to allow 12 months of careful financial planning and research before you collect those goodbye hugs. Below is an outline of the scenarios you should consider as you plan your path to retirement, and a suggested timeframe in which to approach each step.
12 Months Before Retiring
If you haven’t already considered what your finances may look like once you leave your job, now is the time to take a serious look at your investment portfolio, your health care expenses, and any other financial obligations you may have. To plan a realistic retirement budget:
- Make a list of your expenses, both fixed and discretionary. Financial Mentor offers a wide selection of resources, topics, and calculators to help you get a snapshot of your financial situation and where you want to be.
- Determine your anticipated income, identifying how much money will be coming in and from what sources. Try retirement income calculators like the one available at OneAmerica to establish a safe level of spending based on your age and the size of your savings. If the budget numbers don’t work in your favor, you may need to delay retirement by a year or two and continue saving.
- Get familiar with the retirement benefits available to you. If you have a retirement plan with MidAmerica that is funded while you actively work, you can log into your account anytime to review plan details. If the plan is not funded until you retire or separate from service, contact your Human Resources representative for a copy of the Plan Highlights which will explain what benefit is available to you upon retirement.
6 Months Before Retiring
- Research Social Security scenarios to estimate the best time to begin claiming benefits. Holding off until age 70 will mean your Social Security check will be 76% larger than if you had signed on at the minimum eligibility age of 62. If you’re considering taking on a part-time job in retirement, those earnings will impact the amount of Social Security you receive. Postponing part-time work until you reach the full retirement age of 66 will enable you to earn as much as you want, and your benefit won’t be affected. FinancialEngines.com offers a Social Security Income Planner to help you determine your best strategy.
- Do the math on healthcare costs. Analyze your current healthcare needs and project your potential future needs based on your own health history and that of your family. Find out what your employer offers to retirees in the way of medical, life insurance, long-term care, and any other types of insurance coverage. Your employer may provide coverage that is more attractive than anything you could purchase on your own. If your employer offers a Health Reimbursement Arrangement (HRA) through MidAmerica, you’ll have access to money—tax-free—to cover eligible medical expenses during retirement.
3 Months Before Retiring
- Tell your employer. Employers may require a minimum notification time or permit retirement only at specific times of the year, so you’ll need to be aware of these rules.
- Review your investments. If you have a pension plan, understand how it works and what it will pay you. Find out if it pays out in a lump sum or if it’s an annuity and think about rollover options like an IRA. Move investments from volatile stocks into more stable options, such as annuities. You’ll have time to work out any tax implications if you know in advance what your options are. Be sure to note the name of the plan, who the manager is, and how to contact them with questions, since your Human Resource contacts may no longer be an option after you retire.
- Develop a strategy for withdrawals. It’s important to take all sources of income into consideration to ensure that you’re drawing down your assets in the correct order and not creating unnecessary tax liabilities. A financial advisor can help determine how much you should withdraw and from what sources, and then establish a monthly disbursement schedule. A good example is the Special Pay Plan or the Employer-Sponsored Plan, both of which are tax-deferred accounts, meaning you are not taxed until you withdraw the funds. If your tax bracket is lower after retirement, you could potentially save on tax when you withdraw funds from these types of accounts. They allow you to control the timing of your cash distributions as well as the timing of your tax obligations.
- Make plans for your post-career life. Now that business is out of the way, let’s talk about what you’re going to do with your free time! You should have a plan here as well. Perhaps there is a volunteer project you’d like to join, family you want to spend more time with, an exercise routine you want to begin or relaunch, or a dream trip you’ll now have time to take. Find activities that make you feel energized, fulfilled, and appreciative of all those years you worked so hard to get to this point.
You’ve been working hard all these years and now it’s time that your hard-earned benefit dollars work for you. If you have a benefit with MidAmerica, here are some quick tips to get you started.
“JUST RETIRED!” CHECKLIST
- Review your Welcome Kit and Plan Highlights. Once you have officially retired from your employer, we’ll send you a welcome kit and a copy of your Plan Highlights filled with information about your benefit plan. You’ll want to keep this welcome kit. Don’t be tempted to toss it out with the slew of junk mail you receive! This handy piece of knowledge will instruct you on how to access your account online, where to find important forms, how to designate a beneficiary, and how to get in touch with MidAmerica.
- Access Your Account Online. If you haven’t done so already, create an online user account so you can log in and check your account balance, review your investments and transaction history, move and rebalance your funds (if applicable to your plan), and download forms.
- Update Your Contact Information. While you’re logged into your account, you can update your mailing address, email address, and telephone number. Why is this important? We don’t want to lose touch with you just because you’re not working any longer! We may have important information to share about your account, and we’d hate for you to miss out on the educational pieces MidAmerica develops to keep our participants in-the-know about the benefits they have.
For even more help transitioning into retirement, download the full “Just Retired” Checklist by clicking here!
Retirement should be an exciting milestone for you. Fortunately, you have MidAmerica on your side to ensure that this next chapter of your life is fulfilling and maximizes the retirement and health care benefits you have been working towards and can now enjoy. Keep your “Just Retired!” checklist handy at all times
The most common Health Reimbursement Arrangement questions we field are related to claim documentation requirements. Like many retirement and health care benefits, the HRA is regulated through the Internal Revenue Service (IRS). This means that, as your third-party administrator, MidAmerica must adhere to these IRS standards to make sure your plan stays protected and compliant. When you become claims-eligible and begin submitting reimbursement requests, we may follow up and ask for further documentation to verify and approve your claim. The majority of benefits debit card purchases are automatically approved without additional documentation; however, in some rare cases, we may ask for documentation to complete debit card transactions as well.
The who, what, when, where and how much of documentation.
Before you submit your claim for reimbursement, take a look at your corresponding documentation and verify that it includes these five elements. Below is a closer look at each key detail:
- Who: This is the name of the patient or, in the case of insurance premiums, the name of the insured person. This could be you, your spouse or an eligible dependent. Ultimately, to protect your benefit funds, we need to see who the medical expense is for.
- What: What is the medical expense? Is it an annual check-up, a prescription refill, or an insurance premium? Your documentation should include a description of exactly what type of medical expense you’re submitting for reimbursement.
- When – There should be some sort of date on the documentation you provide. This could be the date of medical service, the date your prescription was filled, or the coverage period for your insurance.
- Where – Where did you receive medical treatment? Where was your prescription refilled? The name of the provider or pharmacy should appear somewhere within your documentation. For premiums, make sure the name of the insurance carrier is also included.
- How much – How much did the medical expense cost? Your documentation should always include the cost of the service, item or premium you’re submitting for reimbursement.
Examples of Common Documentation
Having an HRA is an excellent way to cover the cost of eligible medical expenses—tax-free—for both you and your eligible dependents. Understanding what IRS-approved documentation looks like can make all the difference in your reimbursement experience and will help ensure a quicker processing time. If you have questions or need additional information, please call us at (855) 329-0095 or email us at healthaccountservices@myMidAmerica.com. We’re always here to help.
Important note on eligible expenses, reimbursement eligibility and debit card access: Eligible expenses, access to reimbursement funds and debit card accessibility under your HRA can vary depending on plan design. For more information on your unique HRA, review the Plan Highlights included with the Welcome Kit you received upon entering the plan.
On March 11, President Biden signed a COVID-19 stimulus bill into law—known as ARPA, or the American Rescue Plan Act of 2021. ARPA increases the amount employees can exclude from their 2021 gross taxable income for employer-provided dependent care assistance program (DCAP) benefits (such as MidAmerica’s Dependent Care Account) under Internal Revenue Code Section 129.
Before ARPA was enacted, the amount that could be excluded from taxation for DCAP benefits through a Code Section 125 cafeteria plan was capped at $5,000, or $2,500 for married individuals filing separately. With the new law, the 2021 limit has been increased to $10,500 (or $5,250 for married individuals filing separately).
This change is helpful for those employees whose DCAPs were amended as a result of the Consolidated Appropriations Act, 2021 (CAA) to allow an additional grace period or carryover of unused funds from 2020 in 2021. With ARPA, those unused funds may be used in 2021 without the participant having to pay additional taxes on amounts over the usual $5,000 calendar year limit.
Because the maximum allowable non-taxable DCAP limit has increased for 2021, it is also possible to amend the DCAP limit to allow elections to the DCAP to be increased to the new limit for 2021.
MidAmerica’s Stance on ARPA
After thorough review of ARPA, MidAmerica will not amend plans to allow elections up to the increased 2021 DCA maximum limit. Here are four notable reasons that influence this stance:
The mid-year election changes may be challenging to allow and could impact tax filings.
If an employer allows their employees to increase their DCA elections for 2021, employees must be cognizant of any unused 2020 DCA funds that are available for use in 2021 due to an extended grace period or carryover provision afforded by the CAA and adopted by their employer. Specifically, it’s wise not to increase the 2021 DCA election to an amount that will exceed the $10,500 exclusion limit that ARPA allows, once any unused 2020 funds are factored in. Any amount of DCAP benefits that exceeds the applicable limit that can be excluded from gross income must be reported to the Internal Revenue Service (IRS) as taxable income. This can be especially difficult to monitor for DCAPs that do not have a calendar year plan year, as the ARPA limit applies to the 2021 calendar year, not the 2021 plan year.
Nondiscrimination rules could be complicated by the DCA limit increase.
It’s important to note that Code Section 129 nondiscrimination requirements have not changed for 2021. These requirements stipulate that DCAPs cannot discriminate in favor of highly compensated employees (HCEs). If a DCAP is deemed discriminatory, any HCEs participating in the DCAP will lose their exclusion from income under Code Section 129, meaning the amount of DCAP benefits the HCE receives for the year will be included in their gross taxable income for that year.
Allowing employees to increase their 2021 DCA elections mid-year up to the new $10,500 limit may create a discriminatory status for the DCA, causing all participating HCEs to lose their income exclusion under Code Section 129.
Unforeseen impacts to 2022 taxable income.
ARPA provides for a higher exclusion limit in 2021 but what happens in 2022? If there is no further legislation to address income exclusion, then any unused DCA funds from 2021 that are available to be used in 2022 will be subject to the previous $5,000 limit, meaning that any eligible expenses over $5,000 that are incurred and reimbursed in 2022 would be regarded as taxable income in 2022. This is especially an issue for plans that operate on an off-calendar year plan year, so that elections made in 2021 will extend into the 2022 calendar year when the deduction limit is lowered.
The introduction of unplanned employer withholding and FICA obligations.
Code Section 129 provides that amounts contributed to a DCA, up to the prevailing allowable limit, are not subject to federal income tax withholding or FICA taxes. However, if an employer were to allow an employee who has a large DCA amount from 2020 that is available for use in 2021, to increase their 2021 contribution election to the new $10,500 limit, it is possible that there could be unplanned withholding and FICA obligations if the IRS did not deem these elections as reasonably excludable from income.
Overall, with ARPA, employees will not have to pay tax on any excess DCAP funds from 2020 that were carried over or used in a 2021 grace period. However, for the reasons noted above, MidAmerica does not recommend amending plans to allow 2021 participant elections up to the temporary DCAP limit.
Click here to download a PDF version of this bulletin.
Traditionally, public sector employers have generously provided some type of employer-paid health insurance benefit for their early retirees (under age 65) as a way to bridge the gap between early retirement and Medicare eligibility. In a time when health insurance was reasonably affordable, it was common to offer what is known as a “defined benefit” plan, in which an employer promises a specific benefit (such as health insurance) over a specific time period.
Unfortunately, with premiums rising and budgets being strained, it may be challenging for schools, cities, and counties to plan effectively for the retiree health benefits awarded to former employees now in retirement, or for the health benefits promised to current employees as they retire. Yearly expenditures to fund these benefits become a tremendous liability, draining budgets, and forcing schools to deflect money away from classroom instruction and municipalities to reduce spending on needed services and infrastructure.
Employers are now realizing they need to reconsider the benefits packages they offer in an effort to contain costs and long-term financial obligations, yet still provide an impactful retirement benefit to their employees. A Defined Contribution Retirement Plan may be the solution. Contrary to a defined benefit plan which provides a distinct benefit over time, no matter the cost, the defined contribution plan allocates a specific contribution toward that benefit. The contribution is not tied to rising insurance costs, which makes cash flows more predictable, and results in the reduction, or even elimination, of OPEB (Other Post-Employment Benefits) liability. Below are the most noteworthy characteristics that distinguish a defined benefit plan from a defined contribution plan:
|Reportable OPEB liability under GASB 74/75
||Eliminates OPEB liability since benefit is fully funded in real time
|Higher fiduciary liability
||Reduced administrative burden
|Higher administrative burden due to ongoing funding level reviews, contribution tracking, and benefit eligibility
||Helps attract and retain talent
How a Health Reimbursement Arrangement Can Help
One of the most ideal funding options for a defined contribution plan is a Health Reimbursement Arrangement, or HRA. The HRA is designed to reimburse employees for their eligible medical expenses to offset their out-of-pocket costs. The employer regularly deposits funds into individual accounts on behalf of employees while they are employed. These funds, along with any earnings from interest, are free from federal income and FICA taxes, and can be used at any time, upon eligibility. To be eligible to use the funds, the participant must have either separated from service or retired. Participants are 100% vested immediately, meaning that they own the account balance as soon as the account is established.
Migrating an employer’s benefit plan design from a defined benefit to a Defined Contribution HRA (dcHRA) will enable that employer to reduce existing liability and minimize future costs, all while keeping its promise to employees and freeing up resources to better serve students, citizens, and the community.
Employers may also consider establishing a Trust—like a Post-Employment Benefit or Section 115 Trust—as a vehicle to pre-fund employee and retirement benefits. A trust enables the employer to set aside funds while the employee is still actively employed in order to minimize, or even eliminate, the liability later on. Funding through a trust reduces what can be a substantial liability on the financial statement. The trust is generally considered a separate legal entity and trust funds are safe from the employer’s creditors.
The Advantages of Defined Contribution
The beauty of a defined contribution plan is the built-in versatility of the plan design. With this design, the employer has the flexibility to modify their contribution structure and vesting schedules as time goes on, allowing them to take a “wait and see” approach. All the while, they are reducing their OPEB liability and increasing plan reliability by establishing a Post-Employment Benefit Trust as a vehicle to pre-fund retiree benefits.
To current and prospective employees, the dcHRA is an attractive incentive. It’s a great retention tool that enables employees to see their account balance as contributions are added and interest accrues tax-free over time, making the retirement benefit more tangible. Best of all, employees have the guarantee of a consistent contribution that will provide a tax-free avenue to pay for medical expenses in retirement.
If you’d like to learn how HRAs and trusts can help you achieve your financial goals, contact us today using the form below!
Learn more about our HRA!
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.
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Accumulated Leave Case Study Download