Frequently Asked Questions
About Alternatives to Cash Payouts of Accumulated Sick Leave
Individual choice between Cash, HRA and/or TSA
Can we allow individual staff members to elect post-employment payment as cash, HRA or TSA?
No, the IRS does not allow participants to have individual choice between cash and other benefit options; how employees receive
their contributions must be employer determined. Otherwise, allowing individual choice between taxable and non-taxable benefits
invokes the doctrine of constructive receipt causing the plan to lose its tax protections and penalties may also apply.
However, the employer may set a predetermined percentage between benefits that can be applied uniformly across all participants
within an employee class. For example, all teachers could receive 25% of the benefit in cash and 75% into the HRA or TSA. If the
employer chooses, they may also set a predetermined percentage among cash, TSA and HRA. For example, all teachers could receive 33.3% cash, 33.3% HRA and 33.3 % TSA.
Is there any advantage in allowing individual staff members to elect multiple year installments of HRA,
TSA and/or both?
As mentioned above, participants may not individually elect the type of plan nor may they individually elect the payout structure.
The employer must determine the plan design and the plan design must be administered uniformly among all participants. However,
the employer may elect to pay the benefit over multiple plan years but this must be applied uniformly to all participants within a
class. Additionally, with the TSA, the payout cannot exceed five years post-retirement.
Do the advantages/disadvantages of cash, TSA or HRA change in the same way for everyone based
upon the age at retirement (examples: retire after age 59 1/2, retire after Medicare age 65, others)?
Regardless of age, all participants save 7.65% FICA tax (Social Security and Medicare taxes) if the payout is contributed into the
TSA or HRA versus receiving a cash payout. If the intent is for the participant to use the payout towards health insurance premiums
and other medical expenses in retirement, then the HRA provides the better tax benefit since all HRA contributions are tax-free but
must be used for eligible medical expenses. The TSA allows
participants to use the contributions at their discretion and contributions are tax-deferred but participants will still have to pay taxes on the contribution in the year in which they take a distribution.
TSA dollars withdrawn prior to age 55 are subject to IRS early withdrawal penalties. Individuals retiring after reaching age 55 and
having bona fide retiree status may withdraw TSA dollars without penalty. At age 59 1/2, TSA dollars can be withdrawn without
penalty regardless of age at retirement or continuing employment.
With a retiree HRA, a participant can access the contribution at any time after separation of service/retirement, regardless of the
person’s age, and can submit expenses dating back to when the participant became enrolled in the HRA.
Investment Options
Are the Health Reimbursement Arrangement (HRA) and TSA interest earning?
Both HRA and TSA contributions are deposited into a fixed annuity through American United Life® (AUL) a OneAmerica® Company
earning a guaranteed rate of return of 2.0% through 2015. While the rate has not yet been released for 2016, it is guaranteed to not
drop below 1.75% during the year and is guaranteed to not drop below 1.50% during 2017. There are variable options as well. AUL
was chosen as the provider of the group annuity because of their financial strength, ratings and commitment to clients.
Can the value of the HRA and TSA increase or decrease?
As stated above, there are variable options which may increase or decrease the value of the HRA and TSA since they would be
subject to market risk. The investment selection is determined by the District.
Who decides either the fixed or variable option?
The School District of Holmen (District) establishes the plan which states if a variable option would be offered. If the District elects
the variable option, the contribution would default into the fixed annuity and participants would have the ability to transfer their funds
into one of the variable options on the platform.
Does the District earn interest?
No.
Beneficiary Options
What happens to the HRA if a Retiree passes away?
See PowerPoint, Slide 6, Row 4. The surviving spouse and qualifying dependents may continue to use the HRA upon the death of
the participant for their eligible medical expenses. If there is no spouse or dependent, any remaining funds can be used to reimburse eligible medical expenses and premiums not previously submitted on the participant’s behalf. If an account balance still remains, the balance will be forfeited. Unlike with the TSA, current IRS regulations do not allow HRA plans to have assigned,
designated beneficiaries.
If a retiree becomes deceased during the course of the HRA distribution schedule, does our plan
document state that District contributions can continue?
With an HRA, if a person becomes deceased, contributions may continue for the use of a person’s spouse or qualifying dependents.
What happens to the TSA if a Retiree passes away?
With the TSA, participants are able to name a beneficiary. If there is not a beneficiary named, funds would be passed onto the surviving spouse. If there is no surviving spouse, any descendants of the retiree (legal children) would receive the funds. If there are no
descendants, the next in line to receive the funds would be the retiree’s parents. If there are no surviving parents, the funds would be
passed onto the retiree’s estate.
HRA Qualifying Dependents
What is the definition of a qualifying dependent?
A qualifying dependent includes the spouse, tax dependent, and child under age 27 at the end of the tax year.
Does this include a disabled adult child?
Yes, if the participant is able to claim the adult child on their taxes.
Does this include an age 26 dependent still covered under health insurance?
Yes. Any child of the participant under age 27 at the end of the tax year, regardless of whether they are covered under their insurance, is considered a qualifying dependent for the purposes of the HRA and able to seek reimbursement for eligible medical expenses.
Eligible HRA Reimbursements
What is considered an eligible medical expense?
Eligible medical expenses are defined under Section 213(d) of the Internal Revenue Code. IRS Publication 502 may also be used as
a guide.
Most common Eligible Medical Expenses:
• Premiums
• Insurance plan deductibles
• Insurance plan coinsurance
• Office visit co-pays
• Physician service co-pays
• Prescription co-pays
• Over-the-counter drugs*
*IRS requires a doctor’s note or prescription on over-the-counter drugs.
What are considered eligible premium expenses?
Health, dental, vision, long-term care subject to annual IRS limits, Medicare parts B, D, and supplements, prescription drug plans.
Am I able to seek reimbursement for all eligible medical expenses or only premiums?
Participants are able to seek reimbursement for all eligible medical expenses. Initially, we thought the plan needed to be limited to
premium only in order to comply with the IRS non-discrimination rules. However, as long as the same formula to determine the contribution amount is applied uniformly the plan complies and participants will be able to seek reimbursement for all eligible expenses.
Returning to work
What happens if I return to work for my Employer with the HRA or TSA?
With an HRA, you are still considered a retiree and able to access your HRA as long as you do not go back to work for the School
District of Holmen at a level where you would qualify for health insurance benefits. If you return at a benefits eligible level, your HRA
would need to be suspended and you would not be able to access the contribution during the time you’ve returned to work. However, your HRA will continue to accrue interest.
With the TSA, if you return to work between age 55 and 59 ½ for the School District of Holmen and work for more than 20% of your
preretirement schedule in a calendar year, the IRS does not consider you retired and you should not withdraw funds during the time
you’ve returned to work or you can face a 10% early distribution penalty.
With both the HRA and TSA, these rules apply only if participants return to work for the School District of Holmen.
Fees
Are there fees associated with the HRA or TSA?
With the HRA, there are not any quarterly or annual administrative fees, but there are reimbursement fees when claims are filed:
$5.00 for a paper claim, capped at $30.00/calendar year; 2) $2.50 for an electronic claim, capped at $15.00/calendar year; and 3)
no fees if payment is sent directly to the insurance provider for insurance premiums
With the TSA, there are not any fees to the participant. There are not any front-end or back-end sales charges or surrender
charges. The interest rate is a net rate.
Could these fees change in the future?
Yes, the fees are subject to change in the future.
Benefit Availability
Could these retirement benefits end?
Once the funds are deposited in your account, you are considered vested and the money is yours. Even if the District would decide
not to offer the benefit to future retirees, this would not affect your contribution.
What if I don’t need the HRA or TSA right away? Does the District keep the money until a person
wants or needs it?
With both the HRA and TSA, the funds are deposited into the accounts upon retirement; the district does not keep the money until a
participant wants or needs it. You own the account and there is no time frame by when you need to submit a claim to the HRA.
With the TSA, once you reach 70 1/2, you are required to take Required Minimum Distributions by April 1st of the following year as
with other similar retirement accounts.
Am I able to move the money?
With the HRA, funds must remain with AUL. With the TSA, you may roll the money into another qualified retirement account.
How do I access my contribution?
With the HRA, once you’ve incurred an eligible medical expense for reimbursement, you may submit your claim online at www.midamerica.biz/forms/hra-reimbursement-submissions, or complete a paper claim form which can be obtained by calling MidAmerica
at (855) 329-0095. You will be required to submit supporting documentation to substantiate the claim, which includes an Explanation of Benefits (EOB) statement you receive from the insurance carrier indicating the amount you are responsible for, a copay receipt if you are covered under a managed care or prescription drug program or an itemized bill that provides the name of the
provider, patient, cost, date and description of service.
With the TSA, you can request a distribution by completing a Distribution Election Form which can be found by logging on to
www.midamerica.biz or by calling (855) 329-0097.
FICA Tax Savings
What is FICA tax?
FICA tax is a 7.65% payroll tax imposed upon both employers and employees (15.3% total) to fund Social Security and Medicare.
This tax is not imposed if the money is contributed to an HRA or TSA and both the employer and employee would save 7.65%
Do FICA tax savings apply to both the HRA and TSA?
Yes.
Would the participant receive any part of the District’s 7.65% saving?
The FICA savings realized by the District would be retained by the District, much like the FICA and income taxation savings by the
employee are retained by the employee. The District and employee may each independently determine how to apply their portion of
the savings.
Miscellaneous
Is the Post-Employment HRA(s) considered ‘self-funded’ and therefore additional reporting (such as
6055 or 6056) required?
Reporting is required for HRAs when a participant is enrolled in an HRA and is not enrolled in primary health coverage sponsored by
the same employer or a government-sponsored program such as Medicare.
Is it possible to conisder an HSA post-employment payment?
No, an HSA must be covered by a HDHP (For 2015, minimum deductible is $1,300 individual and $2,600 family) and does not allow
for a stand-alone HSA contribution. Additionally, the HSA has annual contribution limits (For 2015, $3,350 individual and $6,650).
HSA contributions cannot be made once a participant is covered by Medicare. HSA contributions cannot be used to pay for health
insurance premiums unless: 1) Medicare premiums; 2) health insurance premiums while collecting unemployment benefits; or 3)
continuation of coverage plans such as COBRA.
What is the timeline? When would this be implemented? Could the current benefits be grandfathered?
Could the longevity incentive HRA payout be reviewed as well?
All parties would be informed before any changes are proposed. The implementation time-line, whether current benefits are grandfathered, and review of the HRA longevity standout is District and Board determined.
The above statements are based on current IRS rules and regulations and the current district plan design but are subject to change at any time.
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