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Retiree Medical Savings Accounts (RMSAs)
Introduction
Retiree medical savings accounts
are employer-funded accounts that accumulate and compound tax-free during
employment and are used to pay for retiree health insurance premiums and
uninsured expenses during the employee's retirement years. Eligible health
premiums include Medicare Part B, Medicare Part D, Medicare supplement
insurance, long-term care insurance, employer sponsored retiree medical, dental
and vision coverages as well as out-of-pocket expenses such as non-insured
medical expenses, prescription drugs, deductibles, co-payments, and
co-insurance. Reimbursements for these premiums and expenses are not taxable
income to the retiree.
The accounts are typically funded
on a regular basis by the employer as a fringe benefit, or through unused and
accrued vacation and sick pay, or severance pay deposits. Account balances are
invested and receive tax-free earnings. Accounts are commonly invested and
managed by the employee much like an employer sponsored retirement plan. Their
value may be based on employer contributions during employment plus earnings,
like 457, 403(b), 401(a), and 401(k) plans, or on a lump sum contribution at
retirement, like pension equity plans.
Employees do not contribute to retiree medical savings accounts, although some
employers also allow employees to pre-fund separate supplemental accounts for
retiree health costs. The employer's contributions to retiree medical savings
accounts are usually based on service and possibly other factors, such as age or
employment status.
Why consider offering Retiree Medical
Savings Accounts?
With the introduction of
GASB Statement 45 and the current GASB Statement
75, many governmental employers may be forced to reduce or
eliminate retiree medical benefits as many private sector employers did
following FASB 106. It is conceivable that fewer employers will offer retiree
medical insurance programs at a time when more employees are most
interested—thus increasing the RMSAs effectiveness as a recruiting and retention
tool.
The financial constraints imposed by the GASB 75 standards have governmental
employers concerned with predicting and managing retiree health care program
costs. Employers that have decided to use retiree medical savings accounts to
support their workforce goals are changing to a defined contribution approach as
a more attractive approach to providing retiree medical benefits than an
open-ended defined benefit approach.
This defined contribution approach makes retiree medical savings accounts more
stable and predictable for each employee. Neither the retiree's retirement date
nor the timing of the reimbursements substantially affect the employer's GASB 75
liability. Retiree medical savings accounts offer a competitive workforce
advantage without exposing the employer to unpredictable and volatile future
expenses.
Is there a consumer's need for RMSAs?
One of the greatest threats to retirement security
is retiree health care premiums and expenses. According to Fidelity Investments,
it is estimated that a couple retiring today at age 65, without access to an
employer sponsored plan, will need about $260,000 in savings to cover lifetime
post-retirement medical expenses. This amount is needed to cover Medicare Part B
premium, Medicare Part D premium, expenses associated with Medicare
cost-sharing provisions, and the cost of services not covered by Medicare. For
those choosing to retire early, the post-retirement medical obligation will be
noticeably larger.
Click to view full Fidelity press release.
Assuming a
post-retirement tax rate of 25%, the tax savings alone generated from tax-free
reimbursement of health care expenses through a fully-funded health care savings
plan would be $50,000, as compared to a taxable withdrawal for payment of these
same expenses from an IRA or employer sponsored retirement plan (e.g., 401(k),
403(b), 401(a), 457).
What about
Government subsidies in the future?
According
the U.S. Government Accountability Office (GAO), by 2020, the number of
individuals in the 55 to 65 age group is projected to increase by 75% and, by
2030, those over age 65 are expected to double, creating the largest percentage
of the U.S. population in retirement in America’s history.
The
Office of the Actuary in the Centers for Medicare & Medicaid Services (CMS)
reports that Medicare is fiscally unsustainable as currently constructed. The
Hospital Insurance Trust Fund, which provides funding for Medicare Part A, is
expected to experience a growing annual cash deficit in 2018, just one year
after Social Security outlays are expected to exceed tax revenues in 2017
The prospect of
additional Government subsidization in the years ahead seems unlikely given the
current financial state of Medicare and Social Security.
What can be
done?
With Medicare
available at age 65, there is some comfort in knowing that a subsidized, or
pre-funded, form of insurance coverage exists. However, there are large
financial “gaps” in Medicare coverage. These gaps include significant
cost-sharing provisions (deductibles and coinsurance). Another gap is Medicare
Parts B and D premiums, which are the responsibility of the participant.
Currently, this collective financial gap accounts for 45% of total health care
costs, or approximately $12,885 per year per couple, according to the GAO.
Given the present outlook, pre-retirees may want to
begin planning for the health care expenses of their retirement years. Accruing
a tax-free Retiree Medical Savings Account through Total Administrative Services
Corporation (TASC) is
one element of successful retirement planning that should not be overlooked.
Contact us for more details
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