Pennsylvania Association of School Business Officials

Transcription

1 Pennsylvania Association of School Business Officials Mailing Address: Office Location: P.O. Box Market Place Harrisburg, PA Harrisburg, PA Telephone FAX Workshop Series ALPHABET SOUP OF RETIREMENT & TAX ADVANTAGE ACCOUNT OPTIONS* February 3, 2017 Webcast (9:30 11:00 am) This workshop will address a variety of retirement plan options and how retirement plan options impact the school district from a staffing and fiscal perspective. Key Topics Include: Understanding the Differences between: o HRA, HSA and FSA; 457 s, 409(a) s, PSERS, IRA s and 401(k) s Understanding how the aforementioned options work together/don t work together How to communicate changes to retirement options to the staff How does this information impact collective bargaining How much manpower does it take to implement these types of changes INTENDED AUDIENCE: Business Managers, Assistant Business Managers, Human Resources Directors SPEAKERS: Mark Holman, Director of Human Resources, School District of Lancaster Robin Hope, Vice President/Educational Services, Reschini Group ANNOUNCEMENTS: All participants must sign-in on the Webcast Attendance Form found at the back of the handout packet for attendance/credit tracking. The site coordinator is asked to collect and submit information on every participant at your site. For credit to be given, forms must be returned to PASBO by February 10. Your webcast experience will be only as good as your Internet connection. If you are having technical difficulties, close all other browsers on your desktop and reconnect, or restart your computer. If you are disconnected at any time during the program, please repeat the log-on procedure to reconnect. You can submit a question at any time using the Chat function at the left side of your screen type your question in the message box and click on Enter to send. Please track your CEU credits for PASBO Professional Registration. (Professional Registration CEUs = 1) Your evaluation of this program is important to us. The primary contact will receive an evaluation link via . Please provide feedback to ensure that PASBO programs are meeting your needs. This program is being recorded to provide access to those not able to participate in the live program and serve as a review tool. Find information in your handout and check out the PASBO Store at for other webcast titles. Thank you for your participation!

2 Pennsylvania Association of School Business Officials Alphabet Soup of Retirement & Tax Advantage Account Options February 3, 2017 Webcast (9:30-11:00 AM) Listen to audio over your computer speakers (If you prefer to listen by phone, you may dial-in using the numbers at the top of your screen. Phone lines will be available 10 minutes prior to the event start.) 1 Presenters: Name: Title: Name: Title: Mark Holman Director of Human Resources, School District of Lancaster Robin Hope Vice President/Educational Services, Reschini Group 2

3 Healthcare with Tax-Advantage Accounts The younger we start to save helps enable us to achieve our ultimate goal of retirement. Our question to you is: Are people saving for their future or are they living paycheck to paycheck with no savings or limited savings? We believe that peoples savings are limited due to their lack of knowledge of the costs of retirement. So how can we educate our employees to save so they will be able to afford to retire after a long and successful career? The topics of our presentation are very relevant to our question. We will be discussing: 3 Healthcare and Tax Advantage Accounts Retirement Options 4 What are Tax Advantage Accounts Tax Advantage Accounts provide us the opportunity to save money for healthcare by lowering our taxable income and increasing our spendable income. The following are tax advantage accounts/arrangements that we will discuss: Flexible Saving Account (FSA) Medical Health Reimbursement Account or Arrangement (HRA) Health Savings Account (HSA)

4 What is a Flexible Savings Account? The Flexible Medical Saving Account is an IRS approved, tax advantage account that is owned by the Employer. This account can be funded by both the Employer and the Employee; however, it is most often funded by the Employee. Commonly know as the Use it or Lose it account; but, with revisions in the code this has changed. Employee contributions are pre-tax through a Section 125 Plan Maximum contribution level for 2017 is $2,600 Unused funds can be rolled to the next year, if the FSA allows for it. There are two rollover options: 1. At the end of the plan year, there can be a Grace Period for 2.5 months when expenses incurred during the 2.5 months can be paid for with the previous year s account balance. 2. If there is no Grace Period, then the employee can rollover to the next plan year a maximum of $ What is a Flexible Savings Account? FSA funds are available immediately meaning the employee does not need to have the full complement of contributions in the account in order to spend down the account. Qualified Eligible expenses are set forth under IRS Section 213 and defined in IRS Publication 502. Expenses must be substantiated. The only real purpose of such plans is for the employee to have a tax advantage when paying for qualified expenses. The account has no savings provision. 6

5 What is a Health Reimbursement Arrangement? A Health Reimbursement Arrangement, also called a Health Reimbursement Account, is an IRS-approved, tax advantaged option. It is employer-funded and reimburses tax free money to employees for out-of-pocket medical expenses. The following provides the specifics of a HRA: HRAs provide the employer flexibility with the plan s provisions. HRAs are considered employer plans. Only employers can make contributions. Eligible expenses are set forth under IRS Section 213 and defined in IRS Publication 502. Expenses must be substantiated. 7 What is a Health Reimbursement Arrangement? Dependent upon how the employer writes the plan, there can be a rollover option. Due to the plan s flexibility, the employer can write the plan to be coupled with a FSA or they can limit the provisions to create a Limited HRA. Typically if stacked with a FSA they are considered Health Reimbursement Accounts. When money is available to the employee is dependent on how the plan has been written. Dependent upon how the plan is written there can be a savings or rollover option; however, limited since there are no employee contributions. 8

6 What is a Health Savings Account? A Health Savings Account is an IRS regulated tax advantage savings account (HSA). To have a HSA, the individual must be enrolled in a qualified high deductible health plan (QHDHP). The HSA provides the individual with a three-fold tax advantage. The following provides the specifics of a HSA: Employee owns the account. Since the HSA is owned by the employee, it is portable. Employee and Employer contributions can be made to the HSA. Eligible expenses are set forth under IRS Section 213 and Publication 502 defines eligible expenses. 9 Expenses do not need to be substantiated for payment; however, employee should keep all receipts for non-deductible expenses and insurance records for deductible expenses in the event of a personal IRS audit. What is a Health Savings Account? IRS dictates the eligibility requirements to be a holder of an HSA. There is an annual maximum contribution; however, there is no limit on the balance of the account. Money must be in the account before expenses can be paid. The account is the most tax advantaged choice. Money goes into the account tax free, interest or gains on the account are tax free and distributions are tax free, if used for qualified expenses. 10

7 Health Reimbursement Arrangement 11 Health Reimbursement Arrangement (HRA) Dependent upon the objectives for using the HRA will depend on how the HRA s plan document will be written to achieve the objections. The employer who elects to use an HRA that is to only reimburse expenses should consider the following: The plan can be designed to reimburse all qualified medical expenses or it can be limited to reimburse only certain costs associated with the medical plan such as copayments, co insurance, and/or deductibles. Employers reimburse employees only after the employee has incurred the approved medical expenses. If reimbursing a deductible, the employer should reimburse the back half of the deductible. All monies that are reserved by the employer for the reimbursements of expenses that are not used are retained by the employer after the plan year ends. 12

8 Health Reimbursement Arrangement (HRA) What is a LIMITED HRA? This type of arrangement is typically used for retirees. It is limited to what expenses are to be reimbursed. Typically, they are used to pay the premium for the employee s post employment healthcare. The money used for this arrangement may come from the selling off of an employee s sick leave or the monies from a retirement incentive. 13 Health Reimbursement Account 14

9 15 Health Reimbursement Account (HRA) This HR Account model provides an employee an account which is similar in design to the Health Savings Account. However, they do not have the regulatory requirements of the HSA. The employer contributions are funded in the employee s account, through a VEBA. Through the HRA, the employee can pay for eligible expenses after they have incurred qualified medical expenses. Under this account Employee contributions are still not permitted. Health Reimbursement Account (HRA) Often the HR Account is stacked with a Medical Flexible Spending Account (FSA). When using the stacked concept there should be an ordering of payment between the FSA/HRA. If the employee elects to have a FSA with the HRA, the FSA should pay first, especially if there is no grace period or rollover option on the FSA. If the employee elects not to enroll in the FSA, the HRA pays automatically or as set forth under the plan when a qualified medical expense is incurred. (Reason why employer should pay the back half of the deductible in this model also). 16

10 Health Reimbursement Account (HRA) Dependent upon the plan design, typically the plan provides a rollover of FSA unused monies to the next year. Maximum rollover is $ Additionally, if any monies remain at the end of the year in the HRA, such monies additionally roll to the next year. With no employee contributions permitted, the savings component of this model is limited. Plan should address what occurs with the money if the employee dies, and how the account is to be used once employee retirees 17 Stacked Option FSA/HR Account Employee Maximum Contribution $2,600. Medical FSA Can provide for a maximum rollover of $500. Should be used first for reimbursement of expenses due to the limiting rollover option. Employee's Account. HR Account Account rolls each year. Employer contributions only. 18

11 Health Savings Account 19 Health Savings Account (HSA) The HSA is the most regulated tax advantage account; however, it provides the savings option that none of the other accounts provide: Governed by the IRS, this is a medical savings account set up and used to pay for qualified medical expenses. The HSA is owned by the employee and is portable. Since it is portable, the employee takes the account with them when they term or retire. Contributions to the HSA may be made by both the employee and employer. Employee contributions are pre-tax with interest earned or investment gains not taxable. In addition, the monies used for qualified expenses are non-taxable. 20

12 Health Savings Account (HSA) Balance will carry forward from one year to the next with no limits on the account balance. Eligibility requirements for an HSA: Must be enrolled in a QHDHP and cannot have other coverage. Cannot be enrolled in TRICARE. Cannot be enrolled in PART A Medicare. Neither you nor your spouse can participate in a Medical Flexible Spending Account. Cannot be claimed as a dependent on someone else s most recent tax return Health Savings Account (HSA) You can use money from your HSA for qualified medical expenses. Qualified medical expenses are those expenses approved by the IRS in Section 213(d) of the Tax Code, (Publication 502) and incurred by the following persons: You and your spouse. All dependents you claim on your tax return. Any person you could have claimed as a dependent on your tax return except if: The person filed a joint return, The person had gross income of $4,000 or more, or You, or your spouse if filing jointly, could be claimed as a dependent on someone else s tax return.

13 Health Savings Account (HSA) At time of Retirement HSA funds can be used to pay for health care for the initial 18 months following retirement and prior to age 65. To fill the gap between COBRA and Medicare, a Limited HRA may be used for the purpose of paying an individual s healthcare premium. The monies placed in the Limited HRA would come from the selling of sick leave or any retirement incentives. If the employee remains enrolled under the QHDHP, they can contribute to their HSA until they are eligible for Medicare or have a change in health plans. 23 Health Savings Account (HSA) Retirement The funds saved in the HSA can be used for post 65 coverage with the exception of a Medigap policy. Contributions cannot be made to the HSA once a person reaches 65 unless the person is actively working and has declined Medicare coverage. However, the monies saved in the HSA can be used to pay for qualified expenses such as Part B premium, Medicare Advantage Plan premiums, copayments, dental and vision, etc. 24

14 HSA compared to FSA/HRA 25 Medical FSA HR Account HSA Limited opportunity to achieve significant long term savings Plan documents must be very specific as to provisions Savings Account provides opportunity to have significant long term savings due to the employee HSA contributions No maximum limit on the HSA balance IRS provides specific requirements to be compliant Which option provides the ability to save? 26 Smart Business + Informed Decisions = Great Schools

15 What you Need to Know 27 What Plans Are Used with the Tax Advantage Plans Health Plan Tax Advantage Plan PPO Plans with Copayments and Deductibles Medical FSA HRA Medical FSA with HRA PPO Plans with High Deductibles and no Copayments HSA (Must have a QHDHP) HRA Medical FSA with HRA 28

16 When Negotiating the HRA Which arrangement pays the first dollars? What medical plan is the HRA being coupled with? Is the HRA coupled with a High Deductible Health Plan with a nonembedded or an embedded deductible? The type of deductible will affect the amount of monies used for the payment of claims. Non-embedded is one family member or a combination of family members can meet the deductible. 29 Embedded is one family member meets ½ of the family deductible, then that member has then met their deductible. The remaining member(s) meet the remaining ½ of the deductible 30 When Negotiating High Deductible Health Plans / HSA Plan to address the following when negotiating the QHDHP / HSA Employer HSA contribution Amount should be negotiated. Percentage of deductible is recommended. When using a percentage contribution, the employer and employee will share any increases in the IRS minimum deductible (if any) based on the negotiated percentage. IRS regulations specify that the employer contribution cannot be made until the effective date of the QHDHP. Deposits may take several days to a week to process through the banking system and be posted to the employee account.

17 31 Negotiating High Deductible Health Plans / HSA Be Creative when negotiating the employer HSA contribution To encourage voluntary contributions by employees, consider an employer match up to a certain amount; similar to a 401K match in the private sector. Contributions for HSAs should be on a declining schedule. Consider offering additional contributions to an employee s HSA for participation in a wellness activity, such as attending health & wellness seminars, obtaining diagnostic testing and screenings, etc. Note: When tying the contribution to a wellness activity, consideration must be given to the regulations by the Affordable Care Act and other applicable federal and state laws. The contribution should only be based on the employee s participation in the activity and not be contingent on the outcome of any program. 32 Negotiating High Deductible Health Plans / HSA Employer HSA contributions belong to the employee Once the employer makes the contribution to the employee s HSA, that money belongs to the employee, and the employer no longer has any right or interest in those monies. IRS regulations prohibit an employer from recouping or seeking a refund from employer contributions made to employee HSAs due to termination of employment, change in coverage status, or just about any other reason. IRS minimum deductibles Consider a deductible above the IRS minimum. Contract language should address future increases (if any) in the IRS minimum deductible. When the deductible is changed by the IRS your plan will also change.

18 HSA Fee Negotiating High Deductible Health Plans / HSA The monthly fee may be paid by either the employer or employee and should be negotiated. New Hires Address the employer HSA contribution for employees hired at a time other than the beginning of the plan year. 33 For new hires there are options if the new employee is hired during the 1 st or 2 nd quarter of the deductible period, a full contribution could be considered. However, if the new hire is employed in the last half of the deductible period, consideration could be given to having such employees enroll in a non QHDHP until the beginning of the new deductible period or pay half of the employer contribution. 34 Negotiating High Deductible Health Plans / HSA Employee voluntary HSA contributions Establish guidelines for the employee HSA contributions through voluntary payroll deduction. Employees should have the opportunity to periodically change their deduction. However, limits such as quarterly, monthly, or other may be established to avoid an undue administrative burden on the payroll department. Employees must be aware of the IRS regulations and must comply with the annual contribution limits and eligibility guidelines. Retirees If employer paid health insurance is offered to retirees, address employer HSA contribution (if any) and HSA fee. If the employer offers a retirement incentive or payment for unused sick leave, etc., a limited HRA may be used for the purpose of paying health care premium.

19 Negotiating High Deductible Health Plans / HSA Employee change in status during the plan year Address the HSA contribution for employees on individual coverage that add a dependent during the plan year, (for example get married during the year and add their spouse). If an employee removes a spouse or dependent during the year and goes to single coverage, you cannot take monies back from them due to the change. (for example divorce or dependent reaching limiting age) HSA eligibility requirements Must be covered by a qualified high deductible health plan on the first day of the month. Must have no other health coverage except a qualified high deductible health plan (for example not on spouse s plan). Must not be enrolled in Medicare or Tricare. Must not be claimed as a dependent on someone else s most recent tax return. Cannot be enrolled in a Medical FSA or HRA 35 Smart Business + Informed Decisions = Great Schools Negotiating High Deductible Health Plans / HSA How to accommodate for those not eligible for a HSA Provide the option of an HRA. Can a Waiver Provision be offered? Would not suggest maintaining the current plan for them to remain enrolled under. 36

20 Employees Who are Retiring Be Aware of IRS Regulations that May Affect The Upcoming Retiree Those who may be retiring need to understand the consequences and possible tax consequences they may be affected by: Last-month rule is a rule that states you are considered as being in the HSA for the entire year if you are enrolled in the plan on the first day of the last month of the last month of the tax year. That should be the month of December. An individual who plans to retire needs to be aware of this rule to ensure they do not contribute too much money in their account for that year.

21 39 Be Aware of IRS Regulations that May Affect The Upcoming Retiree When an employee is working past 65 years and did not take Medicare when they first qualify, caution must be take with respect to when they take their Social Security Benefits. This is with respective if they are actively working and take their benefit or are retiring and take their benefits. The Employee Needs to Know As long as the employee is eligible for Medicare, when they set the date to collect Social Security, Medicare will be retroactive for up to 6 months. Since the employee cannot contribute to a HSA when enrolled in Medicare, they will need to cease their contribution into their HSA up to 6 months prior to the effective date to collect Social Security. If the employee does not stop their contribution they may be subject to a tax penalty. HealthCare at Retirement 40

22 Retirement Pre 65 Retirees Employee who retires and continues to participant in a QHDHP can continue to contribute to their HSA. The retiree can elect to collect their Social Security; however, if they should be awarded their Medicare prior to age 65, they are no longer eligible to contribute to their HSA. Retiree can use their HSA funds to pay for their initial 18 months (COBRA); however, after that they must use other means to pay for their coverage. If there is a Limited HRA they can use this option to pay for coverage. The year prior to turning age 65 and if retiree is contributing to their HSA must be taken to ensure contributions are ceased timely to avoid tax consequences. Continuing to make contributions into a HSA provides monies for Post 65 Medicare coverage, dental and vision coverage. Word of caution: HSA monies cannot be used for Medicare Supplements (Medigap). 41 Smart Business + Informed Decisions = Great Schools PSERS Defined benefit pension system Mandatory participation required. Several options for participation that define the benefit. Defined retirement criteria, with penalties for retirement outside of the parameters. It s future is currently under review and possible revision. 42

23 Why Do I Need To Supplement? The future is uncertain. Pension Reform Health Care Reform Unanticipated Emergencies- Home, Vehicle, etc. Longer Life Expectancies Inflation Quality of Life Travel, Vacation, Etc. Security 43 Supplemental Retirement Savings Plans 44

24 Start Your Plan Today! Why Today? Time Value of Money Saving a little over time often reaps larger rewards than larger savings at or near retirement. Let your money and compounded interest work for you. 45 Time Value of Money (a) If I plan to retire in 3 years and I decide to wait and put $10,000 into an investment when I retire. I will have $10,000 in my account, however I will have missed out on any potential interest. (b) If I wish to retire in 3 years and put $10,000 in my account today, I will have my $10,000 plus the accumulated interest. 46

25 Time Value of Money Example A Year 1 $0 Year 2 $0 Year 3 $10,000 Total Investment = $10,000 B Year 1 $10,000 (+4.5% Interest) = $10,450 Year 2 $10,450 (+4.5% Interest)= $10,920 Year 3 $10,920 (+4.5%Interest)= $11, What Are My Savings Options? Regular Savings Account 403(b) 457 (b) 48

26 Regular Savings Accounts Familiar to all Extremely liquid, as close a branch, ATM or computer No penalties for age or withdrawal No tax advantage as all deposits are made with money that has been taxed and all interest is subject to tax annually (b) A 403(b) plan is a tax sheltered annuity plan. A 403(b) allows employees to contribute pre-taxed dollars into an account for retirement purposes and other uses as defined by IRS. Withdraws can be made at age 59 1/2 or if employment is severed. 50

27 403(b) Continued Employees may take a loan from their account of up to 50% of its value, capped at $50,000. In cases of financial hardship employees may take a disbursement from their account prior to age 59 ½, subject to taxes and a 10% penalty (b) continued Employers may also contribute to 403 (b) plans. Employers frequently use 403 (b) contributions as a means to reimburse employees for sick days, and retirement payouts. Contribution rates are capped at $18,000 for 2016 &

28 403(b) Continued Employees age 50 or older are eligible to make additional catch up contributions of up to $6,000 in 2016 & Employees who have worked for 15 years or more with the organization may make additional contribution of up to $3,000 per year in (b) A 457(b) plan is a deferred compensation plan, which allows you to defer income tax on retirement savings for future years. Withdraws can be made prior to age 59 ½ without penalty. Not as well known or used as a 403(b) plan. 54

29 457(b) Continued Employees may take a loan from their account of up to 50% of its value capped at $50,000. In cases of unforeseeable emergencies employees may take a disbursement from their account prior to age 59 ½. Contributions and earnings are taxdeferred (b) Continued Contribution rates capped at $18,000 per year for 2016 & Plans allow for increased catch up contributions for employees over 50 and or 3 years prior to regular retirement age, as dictated by the plan document. 56

30 What plan is best, 403(b), 457(b) or traditional savings? 403 (b) and 457(b) plans offer the advantage of being tax deferred. With both plans you are only taxed on the amount you withdraw in a given year. Any remaining balance will continue to grow tax free until you make a withdraw. While both plans offer a catch up provision for late savers, though the 457(b) plan has the advantage. 57 What plan is best, 403(b), 457(b) or traditional savings? Continued. Traditional savings plans, based on taxed contributions and interest, are not subject to tax upon withdraw. 58

31 Time for Questions Send text questions using the Chat function at the left side of your screen. Type message in box and click Enter to send. 59 REMINDER: Webcast sites are asked to have every participant sign-in on the Attendance Form and return to the PASBO Office for attendance and credit purposes. Forms must be received by February 10. Thank you for your participation! 60

32 Join us at these upcoming programs: COMMONWEALTH BUDGET SEMINAR February 9, Pittsburgh Marriott North February 10, Riverview IU #6 February 13, Grantville February 14, Montgomery IU #23 February 16, Webcast HOMELESS TRANSPORTATION ISSUES March 9, Webcast 61 Keep an eye out for these upcoming topics: Best practices related to school police and school resource officers Considerations when Working with a Cooperative Purchasing Agency PDE Local School Wellness Policy Template Improving contractor services through relationships Building a cost-savings energy program For info, visit