Common HRA Misconceptions

Posted on July 27, 2020

When it comes to providing employees with a comprehensive health benefit plan, it’s important for the employer to consider all parties involved. Some employees may be open to a change in benefits, while others will undoubtedly be hesitant. Every employee has a unique financial situation that will sway his or her opinion, but MidAmerica has found that through candid conversations between decision makers and employees, a win-win arrangement is achievable.

Since the IRS approved the use of  Health Reimbursement Arrangement (HRA) in 2002, MidAmerica has helped public sector employers across the country save on FICA taxes, reduce their OPEB liability, and help employees offset the cost of rising health care. Despite the increasing adoption of the HRA and the recognition of both its cost-saving abilities and administrative flexibility, employees may be hesitant to accept it as a new benefit due to some common misconceptions. If you’re looking to implement an HRA for your organization, we understand that getting your employees on board is a large part of the process. Below are some common concerns employees, unions and bargaining groups may have and tips on how to help them understand the long-term benefit of the HRA solution:

Employee Concern: “I don’t need my unused leave for medical expenses—I want to use that money for any purpose I want after I retire.”

Employer Response: “The average 65-year-old couple retiring in 2019 can expect to spend $285,000 in health care and medical expenses throughout retirement[1], which means that without an HRA, you will likely use a tax-deferred retirement benefit or cash payout to cover these expenses. An HRA allows that money to be invested for potential tax-free growth and used tax-free when you incur the inevitable medical costs. Plus, we can set up a unique plan design so that a portion of your unused leave is placed into an HRA while the remaining funds are placed into a tax-deferred retirement plan, like a 401(a) or 403(b) plan. Essentially, you’ll maximize the value of your unused leave to help offset the rising costs of health care in retirement.”

Employee Concern: “It seems like I’m losing money since I’m not receiving a cash benefit.”

Employer Response: “You’re actually increasing the value of your benefit since the HRA is tax-free. This means you receive dollar for dollar the benefit amount you are promised. Unlike other retirement plans, the money reimbursed through the HRA is not subject to FICA, Federal, or State income taxes. With an HRA, deposits, accumulation, and reimbursements are all tax-free. In fact, you can easily calculate how much of your total benefit you’d receive based on the benefit vehicle.” Below is an illustration based on a $25,000 benefit amount.

*Based on 20% Federal Tax assumption. Consult your tax advisor for the actual tax rate that would apply to you.

Employee Concern: “Is it true that HRAs do not allow beneficiaries?”

Employer Response: “A participant’s surviving spouse, tax dependents, and qualifying children can still access HRA funds to pay for their own qualifying medical expenses after a participant’s death. Most participants fully spend their HRA  balances over the course of their lifetimes.”

Other Common Misconceptions: What an HRA Is, And What It’s Not


Implementing an HRA can be a creative solution for organizations looking to save on taxes and provide a meaningful, versatile employee benefit. No matter your organization’s current situation, MidAmerica can work with you to create a plan design that meets your unique needs. Our representative can assist in discussions about the benefit with unions, bargaining groups, and employees.

If you’d like to learn more about the HRA, simply complete the form below!

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[1] https://www.investopedia.com/retirement/how-plan-medical-expenses-retirement/

A Special Pay Plan (a type of 403(b) or 401(a) retirement plan) is a simple, cost-effective retirement plan that benefits both the employer and the employee. Designed to handle special forms of compensation like unused sick leave or vacation pay, funds are contributed pre-tax into the participant’s retirement account upon their retirement or separation of service.

The following benefits of a Special Pay Plan illustrate how employers could enhance their current benefits package while saving them money:

How an Employer Benefits from a Special Pay Plan

  • Tax Savings
    Employers avoid 7.65% in FICA taxes that they would have otherwise paid if they did not place the funds in a Special Pay Plan.
  • Unique Funding 
    Special Pay Plans are funded using  unique forms of compensation like unused sick and vacation leave. Payments may also be based on years of service and severance.
  • Recruitment & Retention Tool
    Contributions into the retiree’s plan are made pre-tax, providing the full, untaxed value of the unused compensation. Funds are invested with the potential to grow as well, which means there’s potential to increase account value over time. This creates an impactful retirement benefit that can help employers attract and retain talent.

How a Special Pay Plan Can Supplement a Health Reimbursement Arrangement (HRA)

Employers who currently offer an HRA to their retirees can provide an added benefit to their retirement package by implementing a Special Pay Plan. HRA funds must be used to pay for eligible medical expenses. A Special Pay Plan can supplement that post-retirement income by providing access to money that can be used for any purpose once the retiree has reached the distribution eligibility age*. This means an employer could potentially place unused sick leave into an HRA and the unused vacation pay into a Special Pay Plan, creating two buckets of post-retirement funds for the retiree. Both plans utilize an investment vehicle for potential growth.

Special Pay Plan/HRA Comparison Chart

* Special Pay funds are eligible for distribution once the participant has reached age 55 and separated from service.

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In late June, the IRS released Notice 2020-50, which offers an expanded definition on who is qualified to take advantage of the CARES Act provisions relating to retirement plan* distributions and plan loans. This expanded definition seeks to provide further relief to those affected by COVID-19.

As expanded under Notice 2020-50, a qualified individual is anyone who:

  • is diagnosed, or whose spouse or dependent is diagnosed, with the virus SARS-CoV-2 or the coronavirus disease 2019 (collectively, “COVID-19”) by a test approved by the Centers for Disease Control and Prevention (including a test authorized under the Federal Food, Drug, and Cosmetic Act); or
  • experiences adverse financial consequences as a result of the individual, the individual’s spouse, or a member of the individual’s household (that is, someone who shares the individual’s principal residence):
    • being quarantined, being furloughed or laid off, or having work hours reduced due to COVID-19;
    • being unable to work due to lack of child care due to COVID-19;
    • closing or reducing hours of a business that they own or operate due to COVID-19;
    • having pay or self-employment income reduced due to COVID-19; or
    • having a job offer rescinded or start date for a job delayed due to COVID-19.

Notice 2020-50 also provides further clarification on plan loan amounts and repayment terms administration:

  • Suspension period only applies to payments due between March 27, 2020 and December 31, 2020.
  • Loan payments delinquent prior to these dates are not covered by the CARES Act.
  • All loan payments must resume after the end of the suspension period—no later than January 1, 2021.
  • The loan can be re-amortized to reflect a final payment/due date with a new due date—not to exceed one year after the original loan terms.
  • Loan payment suspension is only available to qualified individuals and requires a signed self-certification form.

Additional Resources

To stay up to date regarding COVID-19 related items, check out our CARES Act Resources page.

 

Important note: Money Purchase Plan (MPP) funds do not qualify for CARES Act relief.

*These updates impact MidAmerica Special Pay, 3121 FICA Alternative, APPLE, Employer Sponsored or Single Vendor plans.

 

By Trent Teesdale, CEBS | Senior Vice President of Business Development

The outbreak of Coronavirus early in the year caused employers across the globe massive and unforeseen challenges. Following the announcement of the global pandemic, school districts and municipalities were forced to quickly respond by shutting down offices, parks, classrooms and other public spaces to maintain social distancing recommendations. We understand that many entities have had to utilize already limited funding to invest in technology, training, and safety equipment during this time—all while keeping our community resources and public education running smoothly. This expansion of services using the same—or in some cases, less—fiscal resources have many public entities turning to layoffs in order to alleviate the financial burden.

On the other side of the spectrum, some organizations are faced with an increase of attrition due to the fear employees may have about returning to a physical work environment as public spaces slowly begin to reopen.

So how do we combat the cost of mass layoffs (both financially and through a loss of resources) and avoid losing too much of the workforce at once due to attrition?

Avoiding Mass Layoffs through a Strategic Buyout Strategy

Unlike the private sector, local governmental entities rely heavily on employees to keep operations running smoothly, as opposed to technology or process enhancements. Since payroll expenses usually account for 60% of a public sector employer’s operational costs, mass layoffs may seem like a logical step to take to reduce spending. However, layoffs in and of themselves can prove to be pricey and should be a last resort—especially when the majority of employees are involved in bargaining or union groups that often contractually require the least senior employees be laid off first. This means that employers would need to reduce their workforce by twice as much to achieve the same financial relief as perhaps laying off a more tenured employee. Knowing this, you can structure your benefits in a way that creates a win-win arrangement for all. Below is a readily available option.

Offer an Early Retirement Incentive

Creating retirement incentives for those who are close to retirement or eligible for retirement is a mutually beneficial way to reduce your workforce without the added cost of paying for unemployment. Oftentimes employees are hesitant to retire before age 65 because they cannot afford health insurance prior to Medicare eligibility. A Retiree Health Reimbursement Arrangement (rHRA) directly and efficiently addresses this need. Funded upon retirement, the rHRA helps bridge the gap between retirement and Medicare eligibility by providing tax-free funding for medical expenses. Special forms of compensation such as unused sick and vacation pay can be used to fund the rHRA, which means the employer is simply using existing earmarked funds more efficiently.

You can further incentivize early retirement by creatively structuring your HRA. For example, you could offer a certain contribution amount for
individuals who waive access to employer-sponsored health insurance or offer a larger lump sum contribution to employees committing to an early retirement decision in writing. The flexibility of the HRA allows you to design it based on the specific issue you need to solve.

rHRA at a glance

  • Early retirement incentive
  • Bridges gap between retirement & Medicare eligibility
  • Can be funded using accumulated leave
  • Triple tax free (tax-free contributions, growth and reimbursements)
  • Flexible plan design means HRA can be structured to meet your specific needs

Attracting and Retaining Talent to Combat Too Much Attrition

In other cases, there may be instances of too much attrition. Organizations have always struggled with employees leaving in pursuit of higher pay, advancements, or family moves. Now, in today’s climate, this issue may be exacerbated by an increased health risk to employees with compromised immune systems or who are over age 60; the fear of adapting to a new set of challenges once onsite classes resume; or overall reduction in job satisfaction. According to a recent USA TODAY/Ipsos poll, 1 in 5 teachers are not likely to return to work. For those over age 55, it’s 1 in 4. However, with creative solutions, employers can offset some of the unwanted attrition.

Offer a Retention Incentive

If your organization is faced with a potentially damaging workforce reduction, the defined contribution HRA (dcHRA) can serve as an incentive for current employees to stay as well as a reason for jobseekers to choose you. Funded while the employee is actively working, the dcHRA can allow plan factors such as a vesting schedule, which incentivizes employees to stay with their employer until they are fully vested in their benefit. Additionally, opting to make a defined annual contribution into the employee’s plan versus a retirement-based defined benefit is a more attractive option that employees can immediately see. As the employer, you would make a tax-free contribution each year into the employee’s dcHRA. Funds are invested for potential tax-free growth and can be used tax-free post-employment by the employee, their spouse and eligible dependents.

dcHRA at a glance

  • Retention tool
  • Attracts talent
  • Can be funded using accumulated leave
  • Vesting schedules can apply
  • Triple tax free (tax-free contributions, growth and reimbursements)
  • Flexible plan design means HRA can be structured to meet your specific needs

Through these uncertain times, we can work with you to determine a path forward that not only saves your organization money but grants you peace of mind.

To learn more, click the link below that best fits your organization’s current need.

Click here to learn more about attracting and retaining talent to combat attrition.

Click here to learn more about avoiding layoffs through strategic buyout strategies.

A message from MidAmerica’s CEO, Jim Tormey

Like most employers, we at MidAmerica needed to take decisive action in a time of great uncertainty to protect our employees from the threat of COVID-19. But guided by our Mission—to take care of those public sector workers who take care of our communities—our teams rallied in record time, bringing us to a productive, fully remote environment in just one week.

As I’ve reflected on some of the successes and challenges MidAmerica has faced over the past three months, I’ve come to believe that we’ll never go back to how things operated before the pandemic hit. While that’s not necessarily a bad thing, it certainly shifts the landscape of how we must operate to effectively take care of our employees and those we serve. In that vein, I offer some insights gleaned from our experience with COVID-19. It’s my hope that our stories help employers, in both the public and private sectors, keep their employees safe, happy, and engaged as we adjust together to the new normal of a post-pandemic world.

1. The transition to remote work can be a non-event if leaders proceed with a Mission First mindset.

Like many, I initially worried about maintaining productivity in a fully remote work environment. Would employees remain motivated to stay on task without in-person accountability driven by a manager? Would they make the effort to connect with their teammates on critical collaboration tasks? I soon discovered my concerns to be unfounded. Any mission-driven organization naturally selects for the type of employees—at all levels—who exhibit intrinsic dedication to the organization’s shared values. These values, in turn, are a powerful motivator to drive accountability to tasks and performance standards, regardless of leadership’s physical presence in the workspace. At MidAmerica, all the logistical trappings of the remote work transition, from check-in cadence to ad-hoc problem-solving methods, naturally sorted themselves out over the course of the first few weeks working remotely. Buoyed by the critical nature of our Mission—more important in tough times than ever before—our team stepped up to the changes imposed by COVID-19 without skipping a beat.

2. Take good care of your employees; they will in turn take good care of your customers.

In challenging economic times, employers of all stripes seek budget savings wherever they can be found. Headcount reduction through layoffs is an obvious, albeit painful way to generate needed savings. But when considering layoffs, employers must balance the short-term savings they generate with the long-term impacts they may leave behind. Layoffs can be costly and, if not handled properly, can devastate morale and leave companies scrambling to cover critical responsibilities, both for day-to-day tasks and more strategic initiatives. We’ve seen voluntary separation incentives act as an ideal solution— especially in the public sector—to drive people cost savings while helping employees transition securely to the next chapter of their lives. But if layoffs become inevitable—as they were, unfortunately, at MidAmerica, take the time to fully understand both short and long-term cost impacts before proceeding. Most importantly, ensure that special attention is paid to facilitating a smooth and dignified process should employees need to be let go. Carta’s approach to this is a great place to start for those who may need to conduct layoffs remotely.

3. Strong cultures can continue to thrive remotely—and are imperative for keeping morale and productivity high.

The challenges of remote work, along with rapid changes to long-established procedures, can be taxing for seasoned employees accustomed to  in-office interaction and routines. Feelings of isolation and collaborative difficulties are widespread in both the private and public sectors; a USA Today poll indicated 1 in 5 teachers are considering not returning to their classrooms come the new school year in Fall. In the work-from-home environment, it is more critical than ever that employees feel connected, engaged, and valued in their work. Small niceties and non-work activities can go a long way toward bridging the human connectivity gap, and toward retaining employees who might be considering departing the organization. We’ve found great success with our “Winning Wednesdays” program—a 15-minute trivia break each Wednesday afternoon that breaks up the work week and gives people a chance to interact with folks across the entire organization. We’ve also kept our employee recognition programs going strong with customized gift baskets and hand-written notes delivered directly to employee homes. Proactive efforts to preserve culture don’t need to be architected, complicated, or even expensive; they simply have to resonate authentically with the members of our teams.

4.   Be mindful that some employees may need help adapting to the new realities of work.

With many companies considering long-term remote work arrangements for the first time in their history, new territory is explored daily regarding how employers should operate for sustainable success away from the traditional office. But with so much focus accorded to preserving efficiency and productivity when working from home, it is easy to lose sight of employees navigating the uncharted waters of a newly blended workplace and home. Instead, double down on listening to your employees and understanding their concerns individually—we’ve used regular companywide pulse surveys and 1:1 videoconference meetings to understand what’s going well and what’s challenging for employees. Be flexible to the maximum extent possible in accommodating their needs and allaying their fears. Policies like flexible on-demand paid time off (PTO), alternate work hours, stipends for newly-incurred work expenses, and even celebrating “guest star” appearances of spouses, children, and pets have helped our teams feel confident in managing the massive quantity of change that all of us have encountered. We’ve always encouraged our employees to bring their whole selves to work, and that commitment continues even as our workplaces have shifted to the home.

Amidst all the uncertainty in the world, our employees and communities are looking to us for guidance and leadership. Few courses of action in the COVID-19 pandemic are so simple as to please everyone, or so certain as to guarantee successful outcomes given all the change that is yet to come. But with our Mission as our North Star and our Core Values as our compass, MidAmerica has remained consistently ready to deliver on our commitment to our communities and those who serve them. There will no doubt be difficult choices ahead, and consensus on the best way forward may be elusive. But decisions made in line with the Mission and Values ensure that, no matter the ups and downs, we will find the best possible solution for continued safeguarding of our employees and all those who depend on us.

Click here to download this blog as a PDF.

IRS Notices 2020-29 & 2020-33

Posted on May 21, 2020

Recently, the IRS released two Notices that impact cafeteria plans and Flexible Spending Accounts (FSAs). Notice 2020-29 provides relief for cafeteria plans in response to the current COVID-19 pandemic, and Notice 2020-33, unrelated to the COVID-19 pandemic, provides a permanent increase to the carryover limit for health care FSAs.

Notice 2020-29 at a glance

Provides temporary relief for cafeteria plans in response to the COVID-19 pandemic. Effective January 1, 2020 and lasts through December 31, 2020.

Cafeteria Plan Mid-Year Election Changes:

  • Allows participants to make prospective election changes during calendar year 2020 regarding health care FSAs and dependent care FSAs, regardless of the reason for the election change and with no additional documentation requirements.
  • Participants may revoke an election, make a new election, or decrease or increase an existing health care FSA election and dependent care FSA election.

Extended Claims Period for Health Care FSAs and Dependent Care FSAs:

  • For grace periods ending in 2020 or for plan years ending in 2020 (i.e., an off calendar year plan), participants can use remaining health care and dependent care FSA amounts to pay or reimburse expenses incurred through December 31, 2020 for the same type of FSA.
  • This extension of time is available both to cafeteria plans that have a grace period and cafeteria plans that have a carryover.

Notice 2020-33 at a glance

Provides a permanent increase to the carryover limit for health care FSAs. 

  • Increases the current carryover amount of $500 to $550 to account for inflation.

Next Steps for Current MidAmerica Clients

  • Plans that currently offer any of these provisions will automatically be amended to accept the changes. For the 2020 year, the employer must adopt an amendment on or before December 31, 2021. If you do not wish to adopt any of these automatic changes, please email us at accountmanagement@myMidAmerica.com.
  • Employers must provide notice of these updates to all eligible employees. Click here to access a shareable version of these updates.
  • Plans that do not currently offer these provisions can adopt the new provisions upon the employer’s request. Simply email us at accountmanagement@myMidAmerica.com.

Additional Resources
To stay up to date regarding COVID-19 related items, check out our CARES Act page!

Retiree Season Tips & Tricks

Posted on May 7, 2020

Throughout the year, there are times when there will be an influx of employees nearing retirement. We understand that as a public sector employer, you’re likely helping these long-time employees navigate the transition from active worker to retiree. Oftentimes, employees are searching for need-to-know information about their retirement benefits, assessing whether or not they’re ready to retire and, if they are, what to do next.
As your plan administrator, we’re here to offer a few tips on how to help your employees—and yourselves—navigate this busy time of year.

Retirement Benefit Education
Naturally, employees nearing retirement feel uneasy about what their transition entails. Their anxieties are understandable—these life-changing choices can feel incredibly overwhelming. But with proper education about their benefits, employees will begin to feel more financially secure in their next stage of life.

MidAmerica is familiar with these concerns, which is why we have created a library of resources available to your employees on myMidAmerica.com. There, they can explore the Education Toolbox, which can be accessed by selecting Resources from home page. If they are a current plan participant, they can also gain access to their secure portal where they will find plan specific information and benefit management functionality. Of course, not every employee will be proactive in using these resources, so we highly recommend sending periodic reminders to them about these materials. Additionally, MidAmerica Account Managers are always available to discuss any questions or concerns you have regarding the current benefit plan(s) in place.

Assess Your Employees’ Retirement Readiness
Knowing when you are financially ready for retirement is not as clear-cut as it used to be. Because of this, employees count on their employers for guidance as they make this life-changing transition. As an employer, it’s important to understand where your more tenured associates stand with regards to their readiness.

In the past, public sector employers might have gauged the success of a voluntary retirement plan based on participation and contribution levels. While those statistics remain important, retirement readiness is affected by other behaviors as well, such as employees’ ability to set specific goals, make informed investment decisions and fully understand the retirement benefits you offer. A key concern for employees considering retirement is how they’re going to pay for health insurance once they leave the workforce. Clearly communicating how to maximize their benefits and how to cover common costs with their retirement funds will help employees make an informed decision (and feel confident about it).

Plan Succession Across All Departments
A succession plan that outlines each position’s key roles and responsibilities can help employers create opportunities to find excellent replacements for retiring workers. Historically, succession plans have been utilized for higher-level employees, but it is recommended that you pay attention to whether the majority of a department is closing in on retirement and manage accordingly. Employers should manage across generations, so that aging employees understand that it is part of their role to train the younger generation. For younger workers, set clear expectations around learning from more experienced staff in order to set the next generation up for quick success.

Customize your communications… And keep communicating!
Retirement planning looks very different for every individual. This is important to consider when crafting communications for employees. When communicating to participants about their retirement planning, it’s crucial to tailor the message so that it is well received and feels relevant to the audience.

A one-time message is unlikely to motivate employees to take control of their retirement planning. Consider sending multiple communications throughout the year to keep the topic top of mind and increase the likelihood of identifying which employees might need assistance with their planning.

How MidAmerica Can Help
Helping employees with their retirement planning is no small task, but it is a crucial element in ensuring long-term success for both the organization and the employee. The good news is you don’t have to do it alone! At MidAmerica, we have many resources available to you, like the Education Toolbox. We continue to develop these resources, so check back often! Beyond that, a dedicated Account Manager can discuss your unique retirement season challenges and develop a game plan to solve them.

MidAmerica is here to assist in caring for your employees and their livelihood, resulting in a more enjoyable transition into retirement for both you and your retirees.

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