Late last year, Congress passed another COVID-19 relief bill, known as the Consolidated Appropriations Act, 2021 (CAA), which was signed into law by former President Trump on December 27, 2020. This new piece of legislation was enacted to, among other things, extend several provisions of the Coronavirus Aid, Relief, and Economic Security (CARES) Act.

Below please find further explanation of which MidAmerica benefit plans are affected by the CAA and what the new legislation means for participants in these programs.

MidAmerica’s Flexible Spending Account (FSA) Plan Amendment Response

MidAmerica has thoroughly reviewed the CAA and, in the best interest of both the participant and the organization, have determined the following FSA and Dependent Care Account (DCA) plan amendment defaults. If you currently provide an FSA or DCA and do not want the below defaults enabled for your plan, the employer must contact MidAmerica by February 26, 2021.

MidAmerica will default to the following FSA/DCA CAA amendments:

  • The Carryover Rule. If the FSA currently has a carryover in place, we will extend the carryover in accordance with the CAA. If the FSA currently does not have a carryover OR a grace period, we will add the carryover in accordance with the CAA.
  • Grace Period. If the FSA currently has a grace period in place, we will extend the grace period in accordance with the CAA.
  • Change in Status. MidAmerica will continue to accept election changes at any time for any reason.
  • Post-Termination Reimbursements. MidAmerica will not implement this change unless requested by the employer.
  • Dependent Care Accounts. MidAmerica will not implement grace periods or carryovers unless requested by the employer.
  • Dependent Care Carryforward. MidAmerica will not implement the carryforward unless requested by the employer.

If an employer chooses to implement any of these optional provisions, they must operationally comply with them until they amend their plans to reflect the change(s). Amendments to FSA plans must be completed by the end of the first calendar year after the plan year in which the change is effective. For example, plan amendments for plan year 2020 must be adopted on or before December 31, 2021.

A Complete Breakdown of the New Rules for Medical FSAs and DCAs

The CAA provides employers with greater flexibility to grant their employees access to unused funds after the plan year ends, for both their medical flexible spending accounts (FSAs) and their DCAs, up to and including the 2022 plan year. Both program types will now have more freedom regarding:

The Carryover Rule.

For plans that allow carryover of unused amounts into the new plan year, the previous cap of $550 has been waived. Another distinction is the ability to apply the carryover rule to DCAs. Previously, DCAs could impose a grace period but not the carryover rule.

Grace Period.

Prior to the CAA, the grace period—an extended period of coverage that allows participants extra time to incur expenses by allowing them to use their remaining FSA dollars after the close of the plan year—was permitted for only the first 2 ½ months of the new plan year. With the CAA, the grace period can be extended for a full twelve (12) months.

With the new legislation, the carryover rule and the grace period accomplish the same thing—the full amount of unused dollars at the close of the 2020 plan year can be used in the 2021 plan year. It’s important to note that while both FSAs and DCAs can now apply the carryover rule or the grace period, only one is permitted. The plan cannot have both.

Unused funds in 2022.

Both the carryover rule and the grace period will continue to be applicable to plan years ending in 2021. That means any unused funds can be carried over into 2022, with no cap, OR available for a 12-month grace period in 2022, provided the employer has elected to apply either of these rules to the plan.

Change in Status.

For plan years ending in 2021, employers may now permit employees to change their FSA or DCA elections at any time for any reason. This was previously allowed only if an employee had a change in status event. However, if the plan year does not coincide with the calendar year, participants should be reminded that employee election amounts across plan years cannot exceed the annual contribution limit. The annual contribution limits for FSA and DCA have not been affected by the CAA.

Post-Termination Reimbursements.

Under the new law, if a plan is amended to allow it, employees who cease to participate in a health care FSA during 2020 or 2021 will be able to use their remaining balances through the end of the year in which participation ceased (plus any grace period) without having to opt for COBRA. Previously, employees who stopped participating in a health care FSA could only access their FSA remaining balances if the plan allowed for a run-off period or once they enrolled in COBRA.

For DCAs, employees who cease to participate may be allowed to continue filing dependent care claims for expenses incurred through the end of the year, if their plan is set up that way. This continues to be the practice under the CAA.

Dependent Care Carryforward.

Participants enrolled in a DCA who have a child that turned age 13 in the 2020 plan year may now be reimbursed for expenses incurred after the child’s 13th birthday for the remainder of the plan year. If there is an unused balance at plan year-end, they may be reimbursed in the following year until the child turns 14. Previously, dependent care expenses incurred after the child turned 13 were ineligible for reimbursement.

Health Savings Account (HSA) Coordination

It’s important to note that the CAA has not changed how FSAs interact with Health Savings Account (HSA) eligibility. Employees who participated in a medical FSA for 2020 but who will be enrolling in a high deductible health plan with an HSA for the 2021 plan year will still be subject to the existing limitations imposed on their access to their prior medical FSA funds. To be clear, employees may not contribute to a Health Savings Account (HSA) while participating in a general-purpose medical FSA. Internal Revenue Service (IRS) Publication 969 explains the HSA/FSA interaction rules. Employers will need to consider how the new FSA rules, if implemented, will affect an employee’s eligibility for an HSA in 2021 or 2022.

Amendments for FSAs and DCAs

  • The new rules outlined above are not mandatory. Employers may opt to apply some, all, or none of the new rules.
  • Employers can choose to which plans they apply the rules. An employer may opt to apply a rule to both medical FSAs and DCAs, to medical FSAs but not DCAs, or to DCAs but not medical FSAs.
  • Employers can choose to which plan year to apply the rules. An employer can decide to apply the rules to the 2020 plan year but not the 2021 plan year, vice versa, or to both years.

With COVID-19 cases continuing to surge in the U.S. and a new administration now in the White House, the Consolidated Appropriations Act, 2021 will probably not be the last piece of legislation to come out of Washington, D.C. related to the pandemic and its effect on the American economy. MidAmerica will continue to monitor the situation and will provide information as it becomes available.

Have questions? We’re here to help.

If you have questions about the CAA, its impact to your plan or the MidAmerica amendment defaults, don’t hesitate to contact our Account Management team at You can also download MidAmerica’s complete CAA bulletin by clicking here.


One of the most common issues public sector organizations face is attracting and retaining talent—often due to a competitive job market and budgetary constraints. According to the Bureau of Labor Statistics, quitting rates have been on the rise over the last 10 years, reporting that annual total quits rose from 1,222,000 in 2010 to 1,435,000 in 2013 to 1,869,000 in 2016 to 2,060,000 in 2019.[1] Even before the pandemic, school districts were seeing teacher absence rates rising, according to a report[2] from the EdWeek Research Center, commissioned by Kelly Education, the school staffing division of Kelly Services. Fifty-six percent of those surveyed said teacher absence rates are higher now than five years ago, and 71% of school administrators and board members see the demand for substitute teachers increasing in the next five years.

As 2020 comes to a close, public sector employers may be reconsidering their talent acquisition and retention strategies. Part of forming a winning strategy involves understanding the common causes of attrition and different ways they can be addressed.

Common Reasons for Attrition

Attrition can occur for several reasons, but competitive compensation and retirement benefits, health care costs, and advancement with other employers tend to be the most prevailing factors that prompt workers to seek employment elsewhere.

With health care costs on the rise, it’s no doubt that both employees and employers are keeping a close eye on how the increase impacts both organizational and personal budgets. In fact, 95% of employers say reducing health care costs is an important workforce issue looking forward[3], which creates a unique challenge for the employer: reducing organizational costs of health care while at the same time reducing health care costs for their employees.

So how can employers bulk up their benefit package and create a competitive talent retention and acquisition strategy—without a blow to their budget?

Cost-Effective Options to Bulk Up your Benefit Package

Attractive benefit packages can increase the chances of employees staying during tough times or help persuade a candidate to choose your organization. Below are just a few ways to directly address some of the more common reasons for attrition and make your benefit package more attractive to talent prospects.

Offer Employees a Tax-Free Way to Pay for Health Care

If your organization has noticed that high health care costs have caused employees to leave, a Health Reimbursement Arrangement (HRA) may be the solution to your issue. An HRA is a triple tax-free benefit vehicle that helps participants pay for eligible medical expenses during active employment or retirement, which means the plan can be designed to either offset a high deductible health plan (HDHP) or bridge the gap between retirement and Medicare eligibility.

HRAs are funded completely by employers for potential tax-free growth over time and can either be funded while the employee is actively working (for use during or after employment) or upon retirement. Unique forms of compensation like unused accumulated leave can be used to fund the HRA, maximizing the use of already earmarked funds. What’s more, the employer can apply unique vesting schedules to the HRA that provide an incentive for employees to stay. Not only will employees see potential tax-free growth accumulating while they work, but no action is needed from them to enroll or contribute—creating a stress-free, generous benefit. Additionally, both the employer and the employee permanently save 7.65% on FICA taxes.

Depending on the plan design, HRAs can help offset costs like prescriptions, eyeglasses, doctor visits and premiums—completely tax-free—and can be used by the participant, their spouse and any eligible dependent.

Maximize Accumulated Leave and Offer a Tax-Advantaged Retirement Plan

Similar to the HRA, the Employer Sponsored Plan can be funded using unique forms of compensation, such as unused sick leave and unused vacation pay; however, with this retirement plan, the benefit can be used—tax-deferred—for whatever purpose a participant chooses once they retire or separate from service.

Funds are deposited by the employer into a 403(b) or 401(a) during active employment for use at retirement, which allows participants to monitor their retirement growth, helping them connect to the benefit they are receiving. Instead of a promise of something at retirement, they can see their retirement funds increasing in value while they work. Additionally, the employer can choose to apply a vesting schedule, which incentivizes employees to stay with the organization until they are fully vested in their benefit.

Employers and employees permanently save 7.65% on FICA taxes while also deferring income tax for the employee until a withdrawal is made. Funds are also invested with the potential to grow tax-free, which means increased value due to earnings over time, further maximizing the benefit.

Provide Part-Time, Seasonal and Temporary Employees with a Powerful Retirement Benefit

Many employers have difficulty providing part-time, seasonal, and temporary employees, such as substitute teachers, with meaningful benefits. The 3121 FICA Alternative Plan was specifically designed for this population of the workforce and allows employers to replace Social Security with a retirement plan that’s invested for potential growth. Instead of the 6.2% contribution into Social Security, employees contribute 7.5% of their wages into an interest-bearing account, on a tax-deferred basis, giving their money the potential to grow over time. Despite what seems like an increase in employee contributions, the employee is left with close to the same take-home pay.

The employer completely avoids the matching 6.2% Social Security contribution, which reduces the stress on their budget without sacrificing the value of the employees’ benefit.

Bulking up your organization’s offerings to employees is a great way to battle unwanted attrition and attract new talent. If you would like to learn more about these solutions, click here.


[1] Bureau of Labor Statistics



If you’re not familiar with Health Reimbursement Arrangements (HRAs), the details of this powerful benefit may seem complicated at first glance. If your employer provides an HRA, we’re here to help you not only understand this cost-effective solution, but also give you the tools you need to take full advantage of it. So whether you’re brand new to the plan or simply need a refresher, below are some key highlights and need-to-know details of the HRA.

What is an HRA?

Simply put, an HRA is a triple tax-free account used to reimburse eligible medical expenses incurred by you, your spouse or any eligible dependent. Account contributions, interest accrual, and reimbursements are always 100% tax-free (hence, triple tax-free). The account, depending on plan design, can be used to pay for a wide range of eligible medical expenses, such as prescriptions, doctor’s visits, and premiums. Funds are provided entirely by the employer, and the account can be designed to never expire. MidAmerica has been administering HRAs since their introduction by the Internal Revenue Service (IRS) in 2002, offering years of experience in handling all compliance and administration in-house for clients across the country.

Why an HRA?

You may wonder why you need an HRA or perhaps why it’s considered such a valuable benefit. What it boils down to is that health care costs—both before and after retirement—are on the rise. Data shows that health care during retirement is expensive and increasing across the country. Multiple studies have revealed that the average couple retiring at 65 could need more than $388,000* to cover lifetime health care costs. Couples retiring before 65 are estimated to need $15,490 per year** to cover costs until they reach Medicare eligibility. What’s more, health care costs are only increasing. Health care expenditure as a share of US GDP has skyrocketed from 13% in 2000 to 18% in 2018 and is projected to hit 20% by 2028.*** Given these numbers, it is imperative employers provide their employees with health care stability in retirement. An HRA offers an effective solution to this health care cost dilemma. By committing funds to a triple tax-free account, an employer slashes the burden of medical expenses for their employees in retirement.  As the experiences of thousands of MidAmerica clients and participants across the country can attest to, an HRA is a great way to satisfy health expenses and save money in retirement.

How does it work?

One of the defining features of an HRA is the incredible plan flexibility it allows. The details of the plan can vary depending on the needs of the client, so we always encourage plan participants to refer to their Plan Highlights**** if they have questions. However, there are certain elements that are true of all HRAs:

  • Enrollment is automatic.
    When an employer implements an HRA, all eligible employees are automatically enrolled in the plan.
  • HRAs are 100% funded by the employer.
    With an HRA, all funds are always contributed by the employer, so that the participant’s paycheck is untouched. Employers can use anything from accrued sick and vacation leave to additional incentives to fund a participant’s account.
  • HRAs are always triple tax-free.
    As mentioned before, these funds enter and exit the account tax-free. These tax savings include avoiding the 7.65% FICA tax for employers and employees. HRAs are invested for potential tax-free growth with either a minimum guaranteed rate of return or, if applicable, in variable investments. Once a participant is claims eligible, they can start using the funds to reimburse eligible medical expenses on a tax-free basis. This includes reimbursements for their spouse and eligible dependents, who can exhaust the account in the event of the participant’s passing.

HRA vs. HSA: Understanding the differences.

You may find yourself confusing HRAs with Health Savings Accounts (HSAs), another tax-free benefit vehicle used to reimburse eligible medical expenses. These two benefits can be easily mistaken for each other and while there are many similarities between the two, there are some key differences worth noting. While offering the same tax savings as an HRA, an HSA is more limited in its applications and flexibility. For example, an HSA can only be used in conjunction with an HSA-qualifying High Deductible Health Plan (HDHP). Additionally, an employee with an HSA cannot be covered by their own or their spouse’s Flexible Spending Account (FSA) unless it is limited to vision and dental only. An HRA, meanwhile, can be used in conjunction with any insurance or benefit plan as determined by your employer. An HRA is also unlike an HSA in that an HRA has no annual contribution limit and can only be contributed to by the employer. An HSA can receive contribution from an employee’s paycheck and has an annual limit of only $3,550 for individuals and $7,100 for families (as of 2020). Finally, an HSA is limited in the types of reimbursements it covers. While both HRAs and HSAs cover Medicare Part B and D as well as vision and dental premiums, HSAs do not cover premiums for health insurance, nor do they cover Medicare supplemental insurance. Although both plans offer savings to their plan participants, an HRA offers the plan flexibility and scope of coverage that an HSA simply cannot provide. To learn even more about the differences and similarities between these two benefits, click here.

Best-in-Class Service

If you still have questions about your HRA or need additional resources, MidAmerica’s Participant Services team is here to help. We provide nationwide coverage for participant education, ensuring you understand how to manage and access your benefit. Simply call  (855) 329-0095 Monday through Thursday from 8:30 a.m.–8:00 p.m. ET and Friday from 8:30 a.m.–6:00 p.m. ET. You can also reach us by email at


*HealthView Services – “The nation’s leading producer of healthcare cost-projection software.” 2019 Retirement Healthcare Brief.

**MEPS – The Medical Expenditure Panel Survey – Health Care Costs/Expenditures.

*** – Centers for Medicare and Medicaid Services – National Health Expenditure Historical and Projections 1960-2028.

****A copy of your Plan Highlights is mailed to you, along with a detailed Welcome Kit, upon your employer’s initial contribution to the plan.

Tampa, FL – MidAmerica Administrative & Retirement Solutions, LLC (MidAmerica), is proud to announce that Ryan Murphy has joined our company as Vice President of Finance. Ryan brings deep financial and operational experience to his new role leading MidAmerica’s Finance and Accounting team.  Ryan is responsible for developing business and financial forecasts while proactively managing the financial health of the business.  He will focus on streamlining operational processes, driving a culture of high performance and continuous improvement that values quality and the client experience. Additionally, he will lead corporate initiatives and manage MidAmerica’s annual budgeting process.

“As MidAmerica continues to grow, it is important that we have cross-functional alignment on every level,” said Jim Tormey, MidAmerica’s President and Chief Executive Officer (CEO). “The addition of Ryan rounds out our executive team, and I am absolutely thrilled to welcome him aboard.”

Prior to joining MidAmerica, Ryan served as Vice President of Finance and Corporate Controller for Transflo (Pegasus Transtech, LLC), a private equity-backed provider of technology solutions for the transportation industry. In this role, Ryan prepared financial and management reporting for the executive team and Board of Directors. He also provided oversight and guidance to a team responsible for accounting, billing and collections, and worked closely with the CFO and the Financial Planning & Analysis (FP&A) team on annual budget, monthly forecast updates and financial modeling. In addition, Ryan coordinated preparation and filing for all federal, state and local tax returns, including K-1’s and the annual financial statement audit.

Ryan holds a Bachelor of Business Administration from the University of Notre Dame as well as a Master of Business Administration from the University of Florida and is an active Certified Public Account (CPA).

About MidAmerica Administrative & Retirement Solutions, LLC
MidAmerica was established in 1995 to take care of those who do so much to take care of our communities. For more than 25 years, MidAmerica has served public sector employers and their employees by providing impactful solutions for some of their toughest issues: rising health care costs, high post-employment liabilities, and attracting/retaining talent.

Currently serving more than half a million public sector employees across the country, MidAmerica is one of the nation’s leading providers of FICA Alternative and Special Pay Plans, Health Reimbursement Arrangements, Flexible Spending Accounts, and Trusts. To learn more about MidAmerica, visit



Understanding Your 3121 FICA Alternative Plan

Posted on November 17, 2020

MidAmerica’s 3121 FICA Alternative Plan is a unique retirement benefit specifically designed for part-time, seasonal, and temporary employees. Known as the APPLE plan to our Californian clients, the FICA Alternative Plan replaces Social Security, creating a powerful retirement benefit that has the potential to grow over time. If you’re a participant and are new to your FICA Alternative Plan, or simply need some quick reminders, we’ve outlined the need-to-know details of this valuable benefit below.

What is a 3121 FICA Alternative Plan?

A FICA Alternative retirement plan is an interest-bearing account that replaces Social Security for part-time, seasonal, and temporary employees. The plan is a type of 3121 retirement plan which substitutes the Social Security portion of the FICA tax requirement with a pre-tax contribution to a FICA Alternative account. Essentially, the benefit not only enables significant tax savings for both the employer and the employee, but allows the account to potentially grow over time through investments. Best of all, MidAmerica assures peace of mind when it comes to the  administration of your hard-earned funds through our PeopleFirst customer service philosophy and more than 25 years of experience. In fact,  the FICA Alternative plan was MidAmerica’s first-ever plan introduced at our founding in 1995!

How does it work?

Once you become a plan participant, the FICA Alternative retirement plan immediately replaces the 6.2% Social Security tax on payroll with a 7.5% pre-tax contribution to your account. Even though the contribution to the benefit increases to 7.5%, your net paycheck remains virtually unchanged due to the pre-tax nature of the contribution.  To understand how a 6.2% tax and a 7.5% contribution can have the same effect on your paycheck, please see the graph below.

How 7.5% Equals 6.2%

Employer after-tax Social Security contributions of 6.2% are replaced with pre-tax employee contributions of 7.5% into a FICA Alternative retirement plan, to potentially grow over time. This actually leaves employees with around the same take-home pay as contributing to Social Security would. Why? Because FICA Alternative Plan contributions are pre-tax.

FICA FICA Alternative Retirement Plan
Gross Salary $1,000.00 $1,000.00
Less 7.5% contribution into retirement plan $75.00
Taxable Income $1,000.00 $925.00
Less 15% Income Tax $150.00 $138.75
Less 6.2% Social Security $62.00
Less 1.45% Medicare $14.50 $14.50
Net Paycheck $773.50 $771.75

Furthermore, your employer permanently saves the matching 6.2% FICA tax which adds to your organization’s budget, freeing up funds to potentially use for needed projects or initiatives. Finally, with MidAmerica, your FICA Alternative plan is invested for potential growth over time with a minimum guaranteed annual rate of return. As a participant, you may also, depending upon plan design, have the freedom to self-direct the investment of your funds to meet personal retirement goals.

When can I access my funds?

You are immediately vested in your FICA Alternative plan (which means you fully own your account) upon retirement, separation of employment, or transfer to full-time employment from a part-time, seasonal or temporary status. Once you are vested (and deemed eligible according to IRS age requirements), you are able to withdraw your retirement funds or roll over your account to a different retirement benefit. Please note certain waiting periods may apply, depending on your unique plan design. To learn more about your unique plan, review your employer’s Plan Highlights.

Understanding the IRS Rules

IRS rules state that participants achieve penalty-free access to their funds when they reach certain age requirements based on the underlying Internal Revenue Code (IRC) section for the unique plan. Under law, regardless of the IRC section, participants are obligated to withdraw a certain percentage of their funds each year after reaching age 72.  To learn more about the IRS age requirements for your plan, review your employer’s Plan Highlights.

Best-in-Class Service

If you still have questions about your 3121 FICA Alternative Plan or need additional resources, MidAmerica’s Participant Services (PSR) team is here to help. We provide nationwide coverage for participant education, ensuring you understand how to manage and access your benefit. In addition to our service team, you always have access to your benefit online by selecting Access Account from the top right-hand corner of the website.*

The PSR team is happy to answer any questions at (800) 430-7999 Monday through Thursday from 8:30 a.m.-8:00 p.m. ET and Friday from 8:30 a.m.–6:00 p.m. ET. You can also reach us by email at


*Please note you will not have access to your account online until MidAmerica receives your first plan contribution.

Dedicated public sector employees often accumulate a substantial amount of vacation time, sick leave, and other retirement incentives over the course of their careers. This accumulation adds up to what may seem like a sizable cash payout once the employee makes the leap into retirement; however, it can also amount to a significant tax liability for that individual—and for their employer as well. While cash payouts are often standard protocol for retiring public sector employees, these perceived “cash windfalls” may not set them up for the secure retirement they had envisioned and earned.

Factors That Are Overlooked

Payroll compensation is subject to FICA and Medicare withholding up to 7.65% for both employee and employer, which means large cash payouts at the time of retirement have tax ramifications for both parties. Additionally, the employee will pay federal income tax on the gross payout. For the sake of example, let’s assume an employee is entitled to a lump sum of $40,000 at retirement and they’re in a tax bracket of 22%.* The employer will be on the hook for $3,060 in FICA and Medicare taxes. The employee will be subject to the same $3,060 in FICA and Medicare taxes, plus federal income tax of $8,800. The $40,000 lump sum has just been reduced to $28,140. That can be quite a blow to a retiree’s sense of security.

Heading into retirement, a well-prepared public sector employee will have done all the math— that is, they’ve calculated their assets and savings (such as pension benefits, accumulated leave payout, and projected Social Security earnings) and compared them to their spending plan. However, during employment, the major share of their health insurance cost was likely paid by their employer. As a result, they can easily overlook planning for this expense in retirement and may not be prepared for what their health insurance will cost without the benefit of employer-subsidized coverage. On average, single retirees pay a monthly premium of $650.** Those who haven’t reached the Medicare eligibility age of 65 will be facing significant out-of-pocket health insurance costs. For them, bridging the gap between retirement and Medicare is imperative.

Two Powerful Solutions

Fortunately, there are tax-advantaged alternative benefit plans that can reduce, and even eliminate, the blow of a hefty tax bill. There are two options widely used among public sector agencies that are each powerful alone, but even better when paired together—the Special Pay Plan and the Health Reimbursement Arrangement (HRA).

Special Pay Plan

With a Special Pay Plan, accumulated leave and other retirement incentive payouts are tax-deferred, eliminating the 7.65% FICA and Medicare taxes for both employer and employee. The funds have the potential for investment growth—tax-deferred—and do not incur federal, state, or local income taxes until they are withdrawn. Once withdrawn, the funds can be used for any purpose. Further, a retiree may be in a lower tax bracket by the time they withdraw their funds, which would mean a lower tax liability than the hypothetical 22% referenced earlier.

Health Reimbursement Arrangement (HRA)

Like the Special Pay Plan, the HRA also allows accumulated leave to be paid out in a tax-advantaged manner. HRA funds are used to pay for qualified medical expenses, as determined by the Internal Revenue Service (IRS). With the HRA, the employee receives a triple tax benefit:

  • Funds are deposited into the HRA by the employer free of FICA and Medicare taxes (up to 7.65%).
  • Earnings on invested HRA funds are untaxed.
  • Reimbursement of eligible medical expenses, including health insurance premiums if applicable, are completely tax-free.

As an added benefit, the HRA can be used by the participant, their spouse, and any eligible dependents. The HRA is a tax-efficient vehicle that maximizes the retiree’s ability to pay for health care, thereby bridging the gap between retirement and Medicare eligibility.

A Winning Combination

While the Special Pay Plan and the HRA are valuable benefit options in and of themselves, the value is augmented when the two work in concert. A benefit program can be designed to divert accumulated leave payouts into two different buckets—Special Pay and HRA—and the allocation percentage can be determined by the employer and/or bargaining group. The result is a “best of both worlds” scenario with tax-deferred funds that can be used for anything and tax-free funds to pay for health care.

To demonstrate just how a Special Pay/HRA combination would benefit a retiree, let’s use the $40,000 lump sum payout in another example. If 25% of that $40,000 were diverted to a Special Pay Plan, the retiree would have $10,000 available for use upon age eligibility with taxes deferred until the time of withdrawal. If the other 75% of the $40,000 payout were placed into an HRA, the retiree would have $30,000 to pay for eligible medical expenses with a $0 tax liability.

The diagram above illustrates an immediate tax reduction of $9,660 across both plans. A deposit of $30,000 into an HRA would enable a retiree to pay for 46 months of health insurance, based on an average premium of $650 per month.

The Special Pay Plan and the HRA are simple to understand, easy to implement, and highly impactful in terms of maximizing employer savings, stretching retiree dollars, and leveraging tax-advantaged opportunities to realize a healthy, financially secure retirement.

Download our Accumulated Leave Case Study!

Want to learn even more about alternative ways to pay out accumulated leave once an employee retires? Download our case study!


*Based on an average salary at retirement of $60,000. Consult your tax advisor for the actual tax rate that would apply to you.

**2019 average single retiree premium (MidAmerica survey)

The Internal Revenue Service (IRS) recently released the 2021 annual contribution limits for Health Flexible Spending Accounts as well as IRC Section 403(b) and Section 457(b) plans.

Health Flexible Spending Accounts
The annual limit on voluntary employee salary reductions for contributions to a health flexible spending account will be $2,750 in 2021, which remains unchanged from 2020.

Health Flexible Spending Accounts Contribution Limits
Tax Year Annual Limit
2021 $2,750
2020 $2,750
2019 $2,700

For more information on Health FSA limits, review Revenue Procedure 2020-45.

403(b) Retirement Plans

The annual salary deferral limit will be $19,500 in 2021, which remains unchanged from 2020.

The following limits will also remain unchanged in 2021:

  • If you qualify for the full amount of the lifetime catch-up, the catch-up contribution limit remains unchanged at $3,000. This brings the annual total limit for employees who qualify for the lifetime catch-up to $22,500.
  • The catch-up contribution limit for employees who are age 50 or over remains unchanged at $6,500. This brings the annual total limit for employees who qualify for the age 50+ catch-up to $26,000.
403(b) Plan Contribution Limits
Tax Year Basic Deferral Limit for All Employees Annual Limit if you Qualify for the Full Amount of the Lifetime Catch-Up (15 Years of Service). Total Lifetime Catch-Up Max of $15,000 Annual Limit if You Qualify for the Age 50+ Catch-Up Maximum Annual Contribution if You Qualify for Both the Age 50+ and Lifetime Catch-Ups
2021 $19,500 $22,500 $26,000 $29,000
2020 $19,500 $22,500 $26,000 $29,000
2019 $19,000 $22,000 $25,000 $28,000

For more information on the current 403(b) limits, review the IRS article, Income Ranges for Determining IRA Eligibility Change for 2021.

  457(b) Retirement Plans

The annual salary deferral limit will be $19,500 in 2021, which remains unchanged from 2020.

The following limits will also remain unchanged in 2021:

  • The catch-up contribution limit for employees who are age 50 or over remains unchanged at $6,500. This brings the annual total limit for employees who qualify for the age 50+ catch-up to $26,000.
457(b) Plan Contribution Limits
Tax Year Basic Deferral Limit for All Employees Annual Limit if You Qualify for the Age 50+ Catch-Up
2021 $19,500 $26,000
2020 $19,500 $26,000
2019 $19,000 $25,000

For more information on the current 457(b) limits, review the IRS article, Income Ranges for Determining IRA Eligibility Change for 2021.



We’re here to help. If you have questions about the recent IRS updates or the impact they may have on your plan, call us at (800) 430-7999 or email us at

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