With the cost of health care increasing by double digits each year, post- retirement health care plans are becoming a hot button in the area of employee benefits. Credit unions seeking to retain and reward their top-notch talent need to learn more about these plans and consider including them as part of their executive compensation package.

A recent study by Fidelity Investments cites that a married couple will need approximately $200,000 in after-tax dollars to pay for medical expenses in their post retirement years. This assumes retirement at age 65 and a life expectancy to age 82. But they will need much more than that if they retire before age 65 when they become eligible for Medicare. Bridging the gap until Medicare kicks in and then beyond will be a huge drain on normal retirement savings. And Medicare does not cover long term care in a nursing home. Yet a recent study by the National Association of Insurance Commissioners predicts that 43% of those now 65 will require that kind of care.

With a post-retirement medical plan, a credit union is able to help key employees address these concerns and so provide a valuable benefit to them. Withdrawals from the plan are non-taxable to the employee provided they are used to pay for qualified medical expenses.

To help you learn more, we at Burns-Fazzi, Brock & Associates have sent you this short CD to familiarize you with post-retirement health care plans, learn how they work, and how they can help you upgrade your executive benefits package.


How does a post-retirement medical plan work?

This kind of plan provides a participant and can also include spouse with reimbursement for eligible health care expenses beginning at retirement. These reimbursements are made from a Liability Reserve Account specifically set up for the participant, and reimbursements are made until the account is depleted.

An employer determines what the total benefit will be and then calculates the annual contributions required to reach that total by the time the participant retires. For the employer, it is an annual expenditure and liability accumulated until the monetary goal is reached.

Claims are filed by the participants for reimbursement. If the participant dies while there is a balance in the account, the balance is used to reimburse health care expenses for the spouse until the account balance reaches zero. Should both the participant and spouse die while there is a balance in the account, the employer has no further liability, and the balance reverts back to the employer as income.


Who are these plans for?

The plans are designed for officers and key personnel and are implemented to attract, reward, motivate and retain the most qualified people available.


Are there any restrictions on who is eligible?

No. However, if you choose to offer post-retirement medical plans to an entire group – rather than limiting it to officers and key employees – the accounting rules are somewhat different.


How are these plans funded?

A credit union can provide this valuable benefit and cover all of the costs associated with the plan through the use of wholesale insurance or annuities. These wholesale products have become a popular method for credit unions to offset the cost of employee benefits. The product provides attractive yields and full cost recovery annually.


Are post retirement medical plans considered non-qualified plans by ERISA?

Yes. This supplemental post-retirement medical plan is unfunded and so is considered a non-qualified plan under ERISA. Supplemental plans are not formally funded because funding would render them subject to all the requirements imposed by Title I of ERISA. Instead, benefits are paid from the general assets of the corporation. As such, these assets are also available to the corporation’s creditors in the event that the corporation becomes insolvent. Arrangements are essentially a promise to pay a sum of money at some time in the future when the employee leaves the institution. Non-qualified plans are those plans which seek to fit into certain “safe harbors” of ERISA which provide exemption from most, if not all of the plans. The number of employees who can be covered is restricted and the plan cannot be funded. There is, however, added flexibility in benefit design and the credit union can pick and choose the employees who will participate in the plans (with some restrictions).


Are there any ERISA requirements that must be met?

As previously pointed out, non-qualified plans are exempt from the funding, participation, vesting and disclosure requirements of ERISA. However, ERISA does require the following of all non-qualified plans, such as post-retirement medical plans:

• The plan must be in writing. The heath care reimbursement agreement between the participant and the credit union will suffice as such a document.
  
• There must be a named fiduciary. It can be assigned in the plan agreement and is usually the credit union.
  
• The Department of Labor must be notified, and a letter should be sent at the time of the implementation of the plan.

A claims procedure must be established, which should be a part of the plan document. The claims procedures must provide written notice to a participant or beneficiary whose claim has been denied, and explain the reasons for the denial in a clear and easy to understand manner. The procedures must also offer a reasonable opportunity for the participant or beneficiary to receive a full and fair review of the denial by the named fiduciary.


What are the tax implications for the credit union and the participant in these plans?

(Section 105(b) of the Internal Revenue Code provides an exclusion from gross income for the amounts paid, directly or indirectly, to the participant to reimburse them for expenses incurred for medical care. Another IRS ruling addresses accident and health plans covering both active and retired employees. It holds that a retired employee may exclude from gross income under section 106 of the Code any amount paid by the company under the plan as its share of the cost of providing hospital, medical and surgical insurance coverage for the retired employee. Contributions would not be subject to state, federal or Social Security/Medicare taxes when made. Payments would be tax-free, as long as they are made for the participant, their spouse, or their dependent’s reimbursable health care expenses. This means that these amounts are generally exempt from taxation, which differs from retirement plan balances. (Retirement plan contributions are tax-free when contributed to the plan, but are taxed at regular rates when paid. The credit union is not required to pay Social Security/Medicare (7.65%) taxes on amounts contributed to the plan.


What are considered reimbursable health care expenses?

• Medical and dental insurance premiums (including COBRA)
  
• Long-term care insurance premiums
  
• Medicare B monthly premiums and
  
• Medicare Part D
  
• Other insurance premiums

How does a credit union implement a post-retirement medical plan?

Your first steps would be to determine who would participate and what type or amount of benefit would be provided.

Next decide if the plan would be self-funding or funded. An analysis of the estimated cost along with projections on the credit union’s fiscal performance will assist in making this decision.


Who is Burns-Fazzi, Brock & Associates?

We are a experienced compensation consultant to financial institutions. Since 1995, we have provided an increasingly wide range of retirement benefits and other compensation-related services to bank and credit union executives, directors and employees. We have a broad expertise in many different areas, including tax, accounting, legal, regulatory, funding and administrative issues that govern financial institutions’ use of benefits and other compensation programs.

For details about our services call Gayla Adams, 877-332-2265 or email gadams@BFBbenefit.com