Health reimbursement arrangements are getting a lot of attention as a tool for funding post-employment health care, according to Larry Stein, national managing director of AIG VALIC, Houston.
Financial advisors should therefore inquire if a client has such an account and, if so, factor it into the retirement plan, he says.
“There is a tremendous appetite for these plans” in the public sector, Stein says, and AIG VALIC is a lead player in that market. Nationwide, the company has 28,000 client groups for retirement plan services and two million participant accounts.
Public sector employers–schools, hospitals, municipalities, etc.–are facing increasing liability for post-employment benefits in a system that has been pay-as-you-go for many years, Stein points out.
Meanwhile, retirees of those employers are struggling to cope with increasing health care costs, says Bruce R. Abrams, president and chief operating officer of VALIC and VALIC Retirement Services Company, in a statement. In fact, many retirees are being “forced back to work” to meet the expenses, Abrams adds.
In this environment, the HRA is being seen as a vehicle for handling both sets of obligations, says Stein.
Originally known as VEBAs (Voluntary Employees’ Beneficiary Associations), HRAs acquired their new look in 2002 when the Internal Revenue Service came out with guidelines on the plans, he notes.
The HRAs are funded by the employer, and the money can be withdrawn, free of federal taxes, for qualified medical expenses not reimbursed by health insurance. Qualified medical expenses can include health insurance premiums, deductibles, long term care premiums and more.
HRAs have no use-it-or-lose-it provision, Stein points out, so the money accumulates from year to year, tax-free. It remains available for qualified medical expenses until death of the retiree, spouse and dependents. That makes it attractive for post-retirement planning, he says.
HRAs also cover qualified medical expenses during the working years, as do flexible spending accounts and health savings accounts, Stein notes. (But the FSAs have a use-it-or-lose-it limitation, and HSAs must be coupled with a high-deductible health care plan, he says.)
The HRA’s carry-over into the post-retirement years works especially well in the public markets, he says.
For instance, teachers often retire with compensation for unused sick days and vacation days. This final “separation pay” may amount to $30,000 to $50,000, he says.
To meet post-retirement health care obligations, the employer can set up an HRA that automatically funnels, say, 20% of separation pay into the HRA. (The other 80% could go to the employee as cash, a deposit into a trust or other vehicle.)
If that is done, the teachers in that system then retire with funded HRAs. The plans have many investment accounts from which the retiree can pick and choose, and the retiree can manage the investment allocation over time. In addition, the retiree can make requests for disbursements from his or her account to cover unreimbursed medical expenses, whenever needed.
AIG VALIC has tested this approach with public schools in Indiana, says Stein. That experience proved so positive that the company now is rolling out HealthSecure HRA, an HRA program for public employers nationwide. It will be distributed through the firm’s own registered reps.
Though the HRA can be used for in-service needs, he says the company sees the plan as having strong appeal for meeting post-retirement health obligations of public employers and employees.
The product “addresses a market need that will continue to grow as the number of retirees in the United Stated trends upward,” observes Abrams in his statement.
Yes, predicts Stein, the HRA fits well in financial planning for post-retirement.
“Also, some employers are negotiating with unions about offering these plans in lieu of pay raises,” he says.