Retiree Medical Trusts—The Solution for Funding Medical Costs in Retirement

By: Linda Stuessi, Dannae Delano and Seth Gaudreau, The Wagner Law Group

Rising healthcare costs, especially during retirement, are concerning to public sector employees, who
tend to retire earlier than private sector employees and face budgeting for significant medical costs
during retirement. Retiree Medical Trusts provide an unmatched, tax-advantages solution for saving
for medical costs in retirement.

This is an excerpt from NCPERS Fall 2025 issue of PERSist.

Funding medical costs in retirement is currently a top concern of both retirees and individuals concerned with saving for retirement. Individuals saving for retirement significantly underestimate these costs by incorrectly assuming that Medicare will be the answer.

Tax-favored Retiree Medical Trusts (RMTs) take advantage of the power of pooled financing and investment like traditional pension plans. Funded by mandatory contributions during active employment, and structured as group health plans, RMTs provide lifetime, tax-free reimbursements for premiums and other medical expenses for members after retirement. As group health plans, RMTs avoid many restrictions imposed on pension plans (e.g., maximum contribution and benefit levels, taxation of benefits, ability to adjust benefit levels to maintain plan stability, etc.). The RMT assets are protected by federal law. 

RMTs, traditionally, are funded by employer and/or employee contributions and reimburse two general types of medical expenses:

• Premium Reimbursement. Reimbursement for medical premiums (e.g., health, dental and vision insurance, Medicare supplement policies, prescription drug policies, and even Medicare premiums).
• Medical Expense Reimbursement. Reimbursement for miscellaneous medical expenses (e.g., eyeglasses, deductibles, drugs, generally any tax-deductible medical expense).

Unlike pension benefits, RMT benefits are not vested. Instead, trustees work with professional actuaries to establish sustainable benefit levels, which can be adjusted periodically in response to demographic experience and investment performance. This flexibility allows the plan to preserve solvency and adapt to changing conditions.

Operation and Governance
RMTs are typically established through collective bargaining agreements. Employers and unions negotiate mandatory contribution levels—often a fixed dollar amount per pay period—deposited into the trust on a pre-tax basis. Contributions may be made solely by employees, solely by employers, or a combination of methods. Employers also have the option to prefund obligations with lump-sum transfers. RMTs can allow for reimbursement of medical expenses for surviving spouses and/or dependent children, ensuring the benefit endures for families even after the member’s death.

Each participating bargaining unit sets its own contribution rate. However, contributions must be uniform across the group or a defined class within it. Individual employees cannot opt out or select contribution levels.

Administration rests with a Board of Trustees that design the plan, select an investment manager, decide on distribution options, etc.

Tax Advantages Drive Value
The tax treatment of RMTs is central to their appeal. If established correctly, employers avoid payroll taxes on contributions, and employees’ contributions are deposited pre-tax, lowering taxable income during their working years. Investment earnings accumulate tax-free within the trust, and perhaps most importantly, retirees receive tax-free benefits through reimbursement of medical expenses. For participants, this stands in sharp contrast to other retirement benefits, which are typically subject to income taxation upon distribution. By converting a portion of today’s taxable wages into tomorrow’s tax-free medical reimbursements, the RMTs can enhance after-tax retirement income.

The Power of Pooling
The RMT model will feel familiar to those familiar with defined benefit pension dynamics. Pooled financing enables the trust to deliver monthly lifetime reimbursements rather than the finite balances typical of individual medical reimbursement accounts, such as Health Reimbursement Arrangements (HRAs).

Pooling also provides investment advantages. Because new employees continually enter the plan with longer investment horizons, RMTs can maintain higher equity allocations than individual HRAs, which typically de-risk near retirement. Over time, this can support more substantial aggregate returns and more stable benefits.

Another key distinction is rollover protection. Unlike HRAs, which may limit the carryover of unused balances, RMTs allow for the preservation and compounding of contributions, ensuring participants do not forfeit unspent funds. RMTs can also be structured to allow for individual account features. For example, sick leave or vacation payouts—typically taxable income—can be redirected into an individual’s account on a pre-tax basis. These balances earn tax-free investment returns and can be used to purchase higher monthly benefit levels in retirement.

Why RMTs are Important
Retiree health care is often a persistent concern for employers in the public sector. Rising medical costs can undermine the adequacy of pension benefits, leading to pressure for benefit enhancements or supplemental programs. While pension funds cannot themselves deliver health coverage, RMTs offer a complementary tool that addresses this vulnerability in a tax-efficient, sustainable way.

With tax advantages available to no other vehicle and the power of pooled investing, these trusts have gained steady traction in the public sector over the past two decades, particularly among public safety workers who retire earlier than the general workforce and have higher retiree medical costs than most. 

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Bios: Linda L. Stuessi, Dannae Delano and Seth Gaudreau are seasoned legal counsel with decades of experience counseling clients regarding health and welfare and retirement plans in the public sector. They are members of The Wagner Law Group’s Retiree Medical Practice Group and specialize in RMT legal compliance.