Taking Action to Manage Post Employment Benefit Options

1
Taking Action to Manage Post Employment Benefit
Options

• October 11, 2007
• 145-300
• Bob Scott
• Susan Smith

2
GASB Liability

• GASB 45
• Governmental Accounting Standards Board
• Determine and recognize an actuarial value of
  promised (defined benefit) retiree medical and
  other benefits on an employers balance sheet
• Other Post Employment Benefits (OPEB) must be
  accounted for just like pension benefits
• OPEB requires the cost be realized while the
  employee is active, not at the time of retirement
• Impacts bond rating

3
Timeline of GASB 45 Requirement

• Implementation in three phases -
• 1st - 100 million or more in annual revenue for
  periods after 12/15/06
• 2nd - 10 million or more, but less than 100
  million, for periods after 12/15/07
• 3rd - 10 million or less for periods after
  12/15/08

4
What is the Concern?

• Employers who provide post-employment medical
  benefits are realizing that they can no longer
  afford to provide a defined benefit solution.
• With the Baby Boomer population entering
  retirement age, Political Subdivisions are faced
  with the liability of defined benefit
• Due to the financial requirements, the Political
  Subdivisions are transitioning from defined
  benefits to defined contribution.

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GASB Liability Transition

• Taking Action to Managing your OPEB Obligation
• Must manage cost of current benefit offering,
  eligibility and caps on future promise
• Transition to a defined contribution from a
  benefit contribution approach
• Health Reimbursement Account
• Notional Account
• VEBA Account (Voluntary employee Beneficiary
  Association)
• Migration strategy
• Review of Texas Legal Retiree Coverage
  Requirements

6
Texas Legal Update

• Chapter 175 of the Local Government Code-applies
  to a person who retires from municipal employment
  with a population of 25,000 or more
• The level of coverage provided under this chapter
  at any given time is the same level of coverage
  provided to current employees of the municipality
  at that time
• The person may elect to continue coverage at a
  reduced level, if offered by the municipality

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Texas Legal Update

• Rate may be at the same rate available to active
  employees or a reasonable or actual utilization
  rate established for retirees that may be greater
  than the rate offered to active employees
• Manual Rate with Retirees
• Manual Rates without Retirees and Retiree rate
  based on their loss ratio
• Manual Rates for Retiree Population
• Awareness of Adverse Selection

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Definition of Eligibility for Post Employment
Benefits

• GASB 45
• Retiree Definition/Employer Decisions
• Definition of Retiree
• Age
• Years of Service
• Accordance with Existing Retirement Program
  (TMRS)
• Available Benefits
• Sample Policy/Ordinance/Resolution
• Dependent Coverage Eligibility
• Survivor Coverage Eligibility
• Disclaimer of Benefit Effective Date and Review
  Date

9
GASB Liability Transition

• Healthcare Plan Options for Retirees
• Early Retirees lt65
• Individual Plans
• Partially Self-funded Medical Comprehensive Plan
• High Plan
• Standard Plan
• Guarantee Issue Plan
• Mini-medical Plan
• Guarantee Issue Plan

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GASB Liability Transition

• gt65 Retirees
• Medicare
• Plan A
• Plan B
• Plan C
• Plan D
• Advantage Plans
• Medicare Supplemental Plans
• Partial Self-funded Medical Comprehensive Plan
• High Plan
• Standard Plan
• Individual Plans
• Mini-Medial Plan

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GASB Liability Transition

• Reduction of Employers Risk of Retiree Claim
  Costs
• Guarantee Issue Plan Option
• 50-64 Early Retiree Options/Access for Life
• Pre-fund guarantee issued based on age
• Guarantee issue coverage at a significantly
  discounted price when the individual reaches
  retirement
• Retiree and Spouse
• Fully portable product
• Currently in Pilot Phase with Texas Department of
  Insurance Review
• Review Discrimination Regulations

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GASB Liability Transition

• Transition from Defined Benefit to Defined
  Contribution
• Health Reimbursement Account
• Retiree Reimbursement Account (defined by IRS
  Code 213 (d))
• RRA Set Up (defined by IRS Code 213 (d))
• VEBA Trust
• Funded
• Notional (Reporting on HRA/RRA liability, claims
  paid upon utilization but not pre-funded)
• TMRS Fund Capped Healthcare Fund Access
• Public Safety Fund Access

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HRA/RRA
Trust Services
Record Keeper
Funding
HRA/RRA Admin

• Trust Services
• Investment Options
• Fixed Account
• Account Record Keeping
• Customer Service
• Fund Management
• Legal

• Individual Daily Valuation
• Unallocated Record Keeping (Investments)
• Funding Source
• Consumer Interaction
• Fund Management
• Contribution and claim funding reconciliation

• Plan Document
• Claims Adjudication
• Claims Reimbursement
• Covered Individual Communication
• Legal Services
• Employer Procedures
• Ordinance
• Resolution
• Policy

• Employer Funding Procedures
• Employees Only
• Active Employees
• Retired Employees

14
Various Types of HRA Solutions Available
Employers have flexibility to create different
HRA plan designs (Plan document required) which
are all based on Sections 105/106 of the IRS Tax
Code
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GASB Liability Transition

• HRA Plan Document Management
• Covered Individual Eligibility
• Covered Individual
• Waiting Period
• Termination of Employment
• Continuation of Coverage
• Spend Down (access to fund account over a period
  of time)
• No Cash Distributions
• Death
• Continuation of Coverage
• Spouse, eligible (tax) dependent

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GASB Liability Transition

• HRA Plan Document Benefit Forfeitures
• Forfeiture
• Notional funds to employer
• Pre-funded funds to trust
• Payment for Qualified Expenses
• Payment for Qualified Premiums
• Claim Administration
• Claim Reimbursements/Timeline
• Legal Support
• Reversion of Funds to Employer per plan document
• HRA Roll Over after designated Run Out Period for
  incurred dates prior to RRA transition

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GASB Liability Transition

• Notional Account
• No cash-out of account
• Employer Funded
• Active
• Continuation of Coverage
• Retiree
• HRA Administrative fee Options
• Individual Record Keeping Fee
• Aggregate Record Keeping Fee
• Administrative Costs of Fund Management and Claim
  Administration

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GASB Liability Transition

• Sample Administrative Costs
• Administrative Fee based on Employers Individual
  Funded Amount
• Up to 500 2.70 PPPM Fee
• 501-1,000 3.25 PPPM Fee
• 1,001-2,000 3.75 PPPM Fee
• 2,000 4.75 PPPM Fee
• Aggregate Record Keeping
• TPA/Employer Costs
• Set Up Fee Costs
• Trigger/Qualifying Event Transition Costs

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GASB Liability Transition

• VEBA Trust Services/Section 115
• Investment Options
• Fixed Account
• Account Record Keeping
• Customer Service
• Fund Management
• Registered Investment Advisor
• No Employer Fund Reversion allowed
• Trust Manages Monies

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Value Proposition

• Funded HRA solution works for both defined
  benefit and defined contribution plans
• Defined benefit plan assets invested per
  political subdivision
• Defined contribution assets contributed to
  individually managed accounts
• Utilize advantages of HRAs
• Tax-Free withdrawals for qualified medical
  expenses and premiums (per plan document)
• Unused funds carry forward from year to year
  without limit

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Value Proposition

• Transition health care liability risk from the
  employer
• Retirees
• Retiree Dependents
• Retiree Survivors
• Investment Earnings are not taxable to employer
  or beneficiary

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Governmental Accounting Standard Board (GASB)
Liability Workflow
A Health Reimbursement Account (HRA)/Retiree
Reimbursement Account (RRA) is an employer
pre-taxed funded account that reimburses
employees for eligible medical expenses including
premiums for eligible medical plans under the IRS
Notice 2002-24. The HRA/RRA account could be
established under a voluntary employee
beneficiary association (VEBA) recognized by the
Internal Revenue Service (IRS) under 26 USC 105
106. A VEBA may administer a HRA. The purpose of
this program is to assist Political Subdivisions
in managing the GASB 43 45 liability.
Review Legal Set-up of Tax Exempt Trust A VEBA
tax-exempt trust would operate under 26 USC 105,
106 501c (9). VEBA is not exempt from the TDI
regulation other than ERISA. Political
Subdivisions are exempt under 29 USC 1003(b). A
VEBA (assuming it is a trust) is tax-exempt under
26 USC 501 (a) and as such is exempt from the TPA
licensing statute under Section 4151.002(8),
Texas Insurance Code. Reimbursing medical claims
is technically the business of insurance under
Section 101.051 (b) (7), Texas Insurance Code.
The VEBA would be the investing and reporting arm
of the Health Reimbursement or Retiree
Reimbursement Account. This is an administrative
function for the HRA and not a medical benefit
function.
Political Subdivisions will need to develop a
solution that can be utilized during active
employment that will carry through retirement
regarding the employers financial obligation
pertaining to post retirement health and other
benefits.
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Governmental Accounting Standard Board (GASB)
Liability Workflow
Exante, is willing to work with the Political
Subdivisions in migrating the post employment
benefit liability from the employers financial
risk. This migration of liability risk will
assist Political Subdivisions in maintaining
their bond rating. The Funded HRA is one possible
solution for employers to transition their
liability costs. The Funded HRA brings
traditional HRAs and a Voluntary Employees
Beneficiary Association (VEBA) or Section 115
Trust together to create a unique offering for
employers and employees who do not want to bear
the financial burden of a traditional defined
benefit plan. A VEBA trust may be established. A
VEBA protects assets, accelerates tax deductions,
and earns tax-free reserves.
Benefit of the Funded HRA include contributions
made to accounts are not taxable to employees,
defined contribution assets contributed to
individually managed accounts, tax-free
withdrawals for eligible medical
expenses/premiums (HRA Plan Discretion), unused
funds carry forward from year to year, without a
limit and investment earnings are not taxable to
employer or beneficiary.
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Governmental Accounting Standard Board (GASB)
Liability Workflow
The Employer should run a current census and
review their retirement policy/resolution/ordinanc
e. The definition of a retiree should be defined
by years of service, age or both. Once the census
of covered individuals is extracted and the
definition of a retiree is documented a migration
wheel defining the transition from a benefit
contribution plan to a defined contribution plan
should be established.
Once the migration wheel is completed and
approved the employer should develop the Health
Reimbursement Plan Document and the employer
funding levels. Upon completion of the funding
and plan document procedures, the Employer should
develop an initial upper management
implementation meeting with the Record/Investment
Keeper of the pre-funded account. This is not a
notional account and does not implement reversion
of funds to employer.
At the initial meeting, the responsibilities of
the Trust, the Record Keeper, the HRA Plan
Document/Employer and the Claim Administrator
will be reviewed and agreed upon. The topic of
administrative fees, enrollment fees, account
setup, check order fee, stop payment fee, tax
return requirements, electronic transfers,
overdrafts, refunds in excess of contribution,
insufficient funds, mailings, stop payments,
transaction access, minimum balance requirements,
research, debit card services, monthly
statements, account closure fee, investment
selection options, welcome kits and electronic
access to information should be discussed.
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Governmental Accounting Standard Board (GASB)
Liability Workflow
Once a Health Reimbursement Account (HRA) claim
is submitted to the claim administrator, the
Claim Administrator will review HRA claim for
eligibility. Upon eligibility approval, the Claim
Administrator will submit a request for funds
from the Record Keeper. The Record Keeper will
sell investments and submit to the Claim
Administrator a positive file that documents the
funds are available for eligible expense access.
The turnaround time regarding the positive file
is approximately five (5) working days.
Once the Defined Contribution Plan is developed
and implemented, the next area of concern is
medical benefit access for the defined
contribution retirees and dependents. A
relationship should be developed with a
guaranteed issue medical plan for the retirees,
survivors and dependents. The guarantee issue
plan may represent a high deductible Health Plan.
For the employer to ease the retirees into a high
deductible Health Plan, the active employee plan
could resemble a high deductible Health Plan.
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Governmental Accounting Standard Board (GASB)
Liability Workflow
To obtain underwriting information regarding the
guarantee issue retiree plan, the employer will
need to submit Three Year History of the
following Health and prescription plan benefits,
medical and prescription schedule of benefits and
medical and prescription claim utilization. The
claim utilization information should be
identified by location code and age of covered
individuals. Current definition of a retiree
should be provided that identify an eligible
participant for the guarantee issue plan.
Employer contribution amounts should be
provided. Covered Individual Population should
include gender, bargaining unit, date of birth,
date of hire, annual earnings, date of retirement
(retirees only) spouse date of birth if married,
plan design. Benefits medical, prescription,
dental, vision, life ECT. and enrollee zip
code. Upon completion of this process, the
employer and their actuary/auditor should review
prior to implementation.
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Migration Wheel
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Migration Wheel
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Thank You

• Questions/Discussions