|
Creating a Tax-Free Retiree Medical Trust
Managing health care costs for public sector employees-and especially retirees-is an issue of growing concern. One possible solution, Retiree Medical Trusts (RMTs), was examined in detail during a breakout session at the 2005 Annual Conference.
This year NCPERS' Health Care Task Force published its third report on this issue. RMTs are one remedial step the Task Force recommends public employers take to curb the burden of health care costs on future retirees.
NCPERS Director of Government Relations Hank Kim began the session with a review of the health-care related problems public sector retirees are facing. They include the elimination of health care coverage for all retirees by some jurisdictions. A more common problem is rising health care costs, of particular concern for public sector employees who retire prior to the Medicare eligibility age. Retirees who are Medicare-eligible face increasing premiums and deductibles.
Shana Saichek, co-author with Kim of the RMT report (available from NCPERS Headquarters), stressed that an RMT can be an important component of a comprehensive health benefit program that sponsors and funds employ.
A RMT is a healthcare pre-funding vehicle that has features similar to both defined benefit and defined contribution plans. In an RMT, employers and/or employees make fixed, defined contribution-style contributions to an RMT during the active employment of participating employees.
These RMT contributions are then pooled and are held in a trust, which is a legally separate entity from the employees and the employer. The trust is controlled and administered by a board of trustees, composed of employees and/or employer representatives. The board's responsibilities include designing the RMT plan, selecting a professional investment manager and investment vehicles, and deciding on distribution options.
RMTs may be regulated by federal or state law, depending on sponsorship, administration, and other similar factors. Under federal or state law, the RMT board of trustees is charged with the fiduciary responsibility to administer the RMT for "the exclusive benefit" of the participating employees. If the trustees fail to do so, they are subject to civil and criminal penalties.
Once participating employees retire, RMTs would ensure regular benefit payments to the retirees for health care expenses in a manner similar to defined benefit pension plans. Both employer and employee contributions are equally permissible on a pre-tax basis, so long as they are mandated for the entire bargaining unit or classification (as compared to individual option plans, such as cafeteria plans).
Saichek noted that RMTs typically have five key features:
- Covers Medical Expenses and Premiums-They may reimburse for both health premiums and medical expenses.
- Avoid GASB Liability-Employers may avoid reporting liability under a new, final GASB rule regarding post-retirement medical liability.
- No 415 Limits-There are no such limits on the amount of annual contributions, as with pension plan contributions.
- Long-Term Benefits-With a pooled plan, trustees can set the benefit level so that benefits last indefinitely (for example, for life), regardless of how much each participant contributed.
RMTs also have tax advantages for employees, employers and retirees:
- Employer Advantage-Employers are not required to pay payroll taxes on the contribution, provided that the entire bargaining unit participates (meaning contributions are pre-tax).
- Employee Advantages-Contributions are not taxed to the employee. Earnings on contributions are tax-exempt. An employee benefit trust that gains IRS tax-exempt status can realize significant earnings, none of which are taxed.
- Retiree Advantage-The reimbursement benefits received are tax-free to the retiree, compared to pension benefits that are taxable.
Shana Saichek, Esq., of the law firm Carney Badley Spellman, has provided legal advice and litigation services to employee benefit plan sponsors in the public and private sectors since 1980. She has experience with a wide variety of plans including health and welfare, VEBAs, pension and profit sharing, apprenticeship, prepaid legal, cafeteria, sick leave/salary conversion and retiree medical reimbursement arrangements.
|
