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1c. Post Employment Health Care Savings Plan - Modification to the City Personnel Policy MEMORANDUM TO: Todd Gerhardt, City Manager CITY OF - FROM: Justin Miller, Assistant to the City Manager VI1AM SE DA'Z'E: - September 16, 2002 , • 7700 Market Boulevard , - Po Box 147 RE: Post Employment Health Care Savings Plan — Modification to the Chanhassen, MN 55317 City Personnel Policy Administration Phone: 952.227 1100 Attached you will find a document outlining the proposed Language for the City's Fax: 952.227 1110 Post- Employment Health Care Plan. In a vote of City employees, 70:8% voted to Building Inspections implement this plan. It is .my, recommendation that the City Council approve -the . Phone: 952.227.1180 plan as approved by the City employees and amend the City's Personnel Policy to Fax: 952.227 1190 reflect this change. Engineering Phone: 952.227 1160 BACKGROUND Fax: 952.2271170 Finance The State of Minnesota recently granted cities the ability to create Post- . Phone: 952.2271140 Employment Health Care Plans for their employees. Basically, these plans allow Fax: 952227 1110 for tax -free contributions to a health care savings plan that can be accessed after Park & Recreation the employee departs from employment with the City of Chanhassen. Phone: 952.227 1120 Withdrawals, which are also tax -free, would be able to be used for a variety of - Fax: 952.227 1110 health care expenses, including insurance premiums, prescription drugs, doctor's Recreation Center visits, or numerous other expenses as defined by the Internal Revenue Service. 2310 Coulter Boulevard Th Minnesota State Retirement System will administer the City's - lan and Phone: 952.227 1400 Y Y p Fax: 952.227 1404 employees will be able to choose from,several different investment options for their contributions. Planning & Natural Resources Phone: 952.227 1130 The structure of the plan is similar to other plans already being used by cities and Fax: 952.227 1110 school districts across the state. Contributions are based upon the number of Public works years of service in PERA, the State's public employee retirement system, with the 1591 Park Road level of contributions increasing as years of service increase. At the end of each Phone: 952.227 1300 calendar year, employees with over 600 hours of accrued sick time will also have Fax: 952.227 1310 half of the hours over 600 converted into cash and deposited into their account. In Senior Center' addition, at the time of separation of employment With the City any vacation time Phone: 952.2271125 accrued will be converted into cash and deposited into their account, as well as Fax: 952.227 1110 half of the severance /wellness payouts if they qualify for such benefits. The final Web Site contribution to the plan will be in the form of FICA payments -, which would have ,www.ci.chanhassen.mn:ps been paid by the City to the - federal government if these contributions were paid in - cash to the employee In essence, this contribution in -lieu of FICA is the employer's contribution to the employee's plan. The City of Chanhassen • A growing community with clean lakes, quality schools, a charming downtown, thriving businesses, winding trails. and beautiful parks. A great place to live, work. and play. Example: _ An employee with 15 years of PERA service making $5.1,100 per year would make the following contributions: 1% of bi- weekly pay: $19.65 per paycheck Tax savings: $5.50 per paycheck City Contribution: $1.50` per paycheck Net Annual Out -of- Pocket Cost: $367.90 Total Annual Accumulation: $549.90 Net Annual Tax Benefit: $1$2.00 This is before any sick time /vacation/severance payouts are converted into cash and deposited into their account. This plan can be amended as often as necessary, but will be reviewed no later'than two years after approval by the City. Council, RECOMMENDATION The City Council adopt the attached resolution and approve the formation of a Post- Employinent Health Care Savings Plan. Attachments - • • CITY OF CHANHASSEN CARVER AND HENNEPIN COUNTIES, MINNESOTA DATE: September 23, 2002 RESOLUTION NO: MOTION BY: SECONDED BY: ADOPT A RESOLUTION APPROVING A POST - EMPLOYMENT HEALTH CARE SAVINGS PLAN AND AMENDING THE PERSONNEL POLICY TO REFLECT THE CHANGE WHEREAS, the State of Minnesota has recently allowed cities to create Post - Employment Health Care plans for its employees; and WHEREAS, the City of Chanhassen's employees have discussed creating such a plan and 70.8% voted to create the plan outlined below; NOW, THEREFORE, be it resolved by the City Council of the City of Chanhassen, Minnesota: 1. That the following Post - Employment Health Care Savings Plan be adopted: Employee % of Pay Scale Employees with 0 -10 years of PERA service will contribute .5% of pay. Employees with 11 -20 years of PERA service will contribute 1% of pay. Employees with 21 -24 years of PERA service will contribute 2% of pay. Employees with 25+ years of PERA service will contribute 5% of pay. Proposed Sick Hour Conversions All employees that have over 600 hours of accumulated sick time will have 1/2 (one -half) of those hours (over 600) converted into cash tax -free, only if it is deposited in their Post Retirement Health Care Savings Account at the end of each calendar year. Proposed Severance/Wellness Pay Outs All eligible employees who have worked for the City for at least 5 years and have accumulated sick time at the time they leave the city's employment will have 1 (one -half) of those hours converted into cash and deposited into their Post Retirement Health Care Savings Account. Proposed Vacation Hours Conversion All employees that have accumulated vacation hours at the time they leave the city's employment will have 100% of those hours converted into cash and deposited in their Post Retirement Health Care Savings Account. FICA Contribution An employee who receives a credit in the Health Care Savings Plan must be paid an additional credit to the Health Care Savings Plan in an amount equal to the FICA taxes that would have been payable to the federal government by the City if the severance pay had been paid to the employee in cash. The contract language will be reviewed within two years. 2. That the City's Personnel Policy be amended to reflect these changes. Passed and adopted by the Chanhassen City Council this 23rd day of September, 2002. AI"I'EST: Todd Gerhardt, City Manager Linda C. Jansen, Mayor YES NO ABSENT Post Retirement Health Care Deduction Calculation MIDPOINTS A B C Bi- weekly Deduction City Contribution Years of PERA Service Tax Savings Social Security Match 2002 0 -10 11 -20 21 -24 25+ 0 -10 11 -20 21 -24 25+ 0 -10 11 -20 21 -24 25+ GRADE MID -POINT 0.50% 1.00% 2.00% 5.00% 28% Marginal Rate 7.65% of Deduction 1 28,960 5.57 11.14 22.28 55.69 1.56 3.12 6.24 15.59 0.43 0.85 1.70 4.26 2 37,770 7.26 14.53 29.05 72.63 2.03 4.07 8.13 20.34 0.56 1.11 2.22 5.56 3 41,060 7.90 15.79 31.58 78.96 2.21 4.42 8.84 22.11 0.60 1.21 2.42 6.04 4 47,030 9.04 18.09 36.18 90.44 2 53 5 07 10 13 25.32 0.69 1.38 2.77 6.92 5 51,100 9.83 19.65 39.31 98.27 2.75 5.50 11 01 27.52 0.75 1.50 3.01 7.52 6 56,620 10.89 21.78 43.55 108.88 3.05 6.10 12.19 30.49 0.83 1.67 3.33 8.33 7 62,590 12.04 24.07 4815 120.37 3.37 6.74 13.48 33.70 0.92 1.84 3.68 9.21 8 68,410 13.16 26.31 52.62 131.56 3.68 7.37 14.73 36.84 1.01 2.01 4.03 10.06 9 74,890 14.40 28.80 57.61 144.02 4.03 8 06 16 13 40.33 1.10 2.20 4.41 11.02 10 81,610 15.69 31.39 62.78 156.94 4 39 8 79 17 58 43.94 1.20 2.40 4.80 12.01 D =(A -B) *26 E =(A +C) *26 F =(E -D) 2002 Net Annual Out -of- Pocket Cost Total Annual Accumulation Net Annual Tax Benefit GRADE MID -POINT 0 -10 11 -20 21 -24 25+ 0 -10 11 -20 21 -24 25+ 0 -10 11 -20 21 -24 25+ 1 28,960 104.26 208.52 417.04 1,042.60 156.00 311.74 623.48 1,558.70 51.74 103.22 206.44 516.10 2 37,770 135.98 271.96 543.92 1,359.54 203.32 406.64 813.02 2,032.94 67.34 134.68 26910 673.40 3 41,060 147.94 295.62 591.24 1,478 10 221.00 442.00 884.00 2,210.00 73.06 146 38 292.76 731 90 4 47,030 169.26 338.52 677.30 1,693.12 252.98 506.22 1,012.70 2,531.36 83.72 167 70 335.40 838.24 5 51,100 184.08 367.90 735.80 1,839.50 275 08 549 90 1,100.32 2,750.54 91.00 182.00 364.52 911.04 6 56,620 203.84 407.68 815.36 2,038.14 304 72 609.70 1,218.88 3,047.46 100.88 202.02 403.52 1,009.32 7 62,590 225.42 450.58 901.42 2,253.42 336.96 673 66 1,347.58 3,369.08 111.54 223.08 446.16 1,115.66 8 68,410 246.48 492.44 985.14 2,462.72 368.42 736.32 1,472.90 3,682.12 121.94 243.88 487.76 1,219.40 9 74,890 269.62 539.24 1,078.48 2,695.94 403.00 806.00 1,612.52 4,031.04 133.38 266.76 534.04 1,335.10 10 81,610 293.80 587.60 1,175.20 2,938 00 439.14 878.54 1,757.08 4,392.70 145 34 290.94 581 88 1,454.70 Important Caveat: These deductions are untaxed. The reduction in take -home pay is a lower amount due to savings on FICA (7.65 %), federal tax (15% min.) and state tax (5.35% min ). Tax savings may be greater if an employee is in a higher state or federal tax bracket. ._ .HCSP POST RETIREMENT - .- HEALTH CARE SAVINGS PLAN What You Need to Know Abou the Post Retirement Health Care Savin Plan r r 5's � =�. r'- 'r S s ` G , ;1-!-`," • t _ FL I -i C ; ‘ .. , 1,A. , .: MSRS yr� y \imnc to State Retirement Systcm . +' h0 L - m pirc Dive, Suite 300 St Paul, MN 55103 -1855 klcphune (651) 296-2761 'loll Pict: (800) 657 -5757, Fax (651) 297-52 38 1 -Mail msrs@state mn us Administered by the Minnesota State Retirement System \\ c h site \\v'\amsrs tare mn us MSRS 2201 February 2002 • What is the post retirement health care What type of contributions can be made savings plan? to the plan to receive the favorable The post retirement health care savings plan is an tax treatment? employer- sponsored program that allows employees to Employer Contributions: For example, an employer could save money into an account to pay medical expenses elect to put a specific dollar amount into employees' and/or health insurance premiums after termination of accounts, or set aside a em ercenta e of to ees' salaries public service into the accounts p g p y Employees will be able to choose among seven different Mandatory Employee Contributions: For example, a investment options provided by the State Board of portion of the next salary increase could be required to be Investment. Assets in the account will accumulate tax -free, set aside in a plan. and since payouts are used for medical expenses, they will remain tax -free Severance Pay: For example, many public employers pay unused vacation or sick leave as severance pay at the time of termination. All or a portion of the severance pay may be What legal authority exists to offer the required to be put into the plan. post retirement health care savings plan? Laws of ?Minnesota 2001, Chapter 352 98, authorizes MSRS How would I benefit from the plan? to offer this program to state employees, as well as all other governmental subdivisions The post retirement health care savings plan allows employees to set aside money to cover the ever- increasing The Internal Re\cnuc Service (IRS) authorizes government costs of health insurance and medical expenses after bodies to establish "funds" v\hich are deemed to be an termination of public service. While deferred compensation "integral part" of the organization IRS rulings state that plans or retirement accounts provide a tax- deferred benefit, providing emplo)cc \\elfare benefits to retirees is an amounts paid out arc considered taxable income Under the "t<sential function" of state or local government's activities past retirement health care savings plan, amounts The IRS also deemed that providing retiree health benefits contributed are tax -free and no taxes are paid on amounts is an "essential function " Therefore, it is considered an to pa} health and dental insurance premiums and to cover integral part of the government's activities and, as a result, out -oi- pocket medical expenses it cnlo)5 the entity's tax exempt status (In Treasury Regulation Section 301 7701- 1(a)(3)) This tax advantage could result in significant savings to you and your family For example, let's say you are eligible for 55,000 in severance. If paid in cash, after subtracting Who chooses how contributions will be federal, state, and FICA (social security and medicare) taxes, the net amount of the payment would be approximately made to the post retirement health care S3,000 If that same amount was transferred into your post ..:savings plan? $ P retirement health care savings plan, the entire amount of Employees covered by a bargaining unit: '-,5,000 would be available to provide health care coverage Amounts to be put into the account must be negotiated or agreed to by both the bargaining unit and employer What if I die before my account is exhausted? Employees not covered by a bargaining unit: Amounts to he put into the account must be included in a The employee's spouse and dependents must use the personnel policy and must cover all employees covered account for medical expenses which will be tax -free If no under the personnel arrangement spouse or dependents, the account balance will be paid to a designated beneficiary or to the estate. At this point, the payment is subject to state and federal taxes; however, it is still exempt from FICA (7 65 %) 1 2 How does my employer benefit? The chart below shows the investment options, and the annual investment fee charge for each investment option. The post retirement health care savings plan allows your employer an opportunity to offer a benefit that you can use Account Name Annual Fee* to cover the rising cost of health care. Employers are not Fixed Interest 0 13% required to pay FICA (7.65 %) taxes on amounts contributed to this plan. Money Market 0 01% Bond Market 0 09% What responsibilities does my employer Income Share 0 01% have regarding the administration of the Common Stock Index 0 02% post retirement health care savings plan? Growth Share 0 26% The main responsibility is to determine how contributions will be made to the plan and making contributions to the International 0.32% plan on behalf of eligible employees. MSRS will provide Fccs are subject to change } our employer with employee enrollment kits to get )0u started. Will I receive statements? How do I get started? Yes You will receive an account statement every six Your employer will provide you with an enrollment kit months It will be mailed directly to your residence. Complete the forms and return them to your employer These forms are for\\ arded to MSRS The forms ash for - . data such as name and address as \\-c11 as beneficiary at is the cost? dic The administrative fees to administer the plan are deducte. \\t \\ ill then send }ou a welcome letter and provide you \v ith from your account. You will be charged 0 15% of your a personal identification number (PIN) to bc used to access account balance each quarter (0 60% per year). For account information and change investment allocations. example, if you have an account value of $10,000, Investment allocations can be made on the MSRS Web site at 515 per quarter will be deducted from your account. tw\v\\ or on a paper document. The maximum annual fee charged on an account will be 51-1-0 or $35 per quarter All fees are subject to change `How will my assets be invested? You will bc able to choose At what point am I eligible to begin among seven different . receiving amounts to cover medical im cstmcnt options You ,. _ .'- l insurance or expenses. may change }our investment h 4 . i ', You are eligible to draw from your account under any of thl selections once per month.. '�� following circumstances: You can contribute to as ]Ilan) of ... '`S' ,.,_. the se en a\..1lable investments _1 . .? \_ y • If you leave employment as \ 011 \vish. I. a .: .`. ' : r"a ` ^_ • If you retire * :. , : . a - • If you are collecting a disability benefit from one of the 01 _ public pension plans i . ;�- .` ` • If you are on a medical leave (six months or longer) } . ' • If you are on a leave of absence (one year or longer) 3 4 • How will reimbursements be made? - Eligible Expense MSRS will reimburse you directly for your out -of- pocket Eligible medical/dental expense account expenses are those medical expenses Payments will be made to plan expenses which are deductible for federal income tax participants who submit proper claims every week. purposes. These include expenses related to the diagnosis, However, there is a $75 minimum reimbursement* care, treatment or prevention of disease (see examples below). requirement Do not submit a claim until you have For more examples, see IRS Publication 502 which is collected 575, or more worth of receipts. available from your local IRS office. The minimum reimbursement is subject to change Reimbursable Health Care How are reimbursements from the post Expense Examples retirement health care savings plan treated Your HCSP account may be used to cover the cost of health for tax purposes? and dental insurance, long -term care insurance, and monthly Medicare B premiums. In addition, a List of costs Reimbursements paid from the post retirement health carp that can be reimbursed is shown below• savings plan to cover health insurance and medical expenses \will never be taxed No income tax withholding or reporting • Acupuncture and acupressure required. • Air filter prescribed for treatment of allergies 11owcvcr it is important that you understand that this • Alcoholism or drug dependency treatment and alone; can 0111) be used to offset health care costs or the treatment centers cost of health insurance, and at no time can be accessccl for other purpose; • .ambulance • Artificial 1laths and teeth • girth Loiltrol devices (\\ ith prescription) • Birth control pills • Braille books and magazines (to the extent prices exceed prices for regular books and magazines) • Car tspecial medical equipment within) • Childbirth preparation classes for mother, excluding portion for mother's coach • Condoms (\v ith prescription) { • Contact lenses 4.4 3 b • C.0111 aC1 lens solution • Dental treatment, including dentures, and orthodontia (braces and retainers) r •«, • Diathermy. Y} { • Drugs which require a prescription to be purchased q • Operations and related treatment n x y rt . ��a fc . °- r y • 1: \ C e \101111ation �� R • Eve e Llasscs 5 6 • Pees to doctors, hospitals, etc. for • Mentally handicapped, special home for Anesthesiologist • Nurses' expenses and board Chiropodists • Nursing care Chiropractor - Christian Science Practitioners • Nursing home (if for medical reasons) Clinic • Obstcl rical expenses Dentist • Organ donation, organ transplants Dermatologist • Orthopedic shoes, excess of costs over normal shoes Gynecologist Midwife • Oxygen equipment Neurologist • Radial hcratotonly Obstetrician • Rental of medical equipment Ophthalmologist (see IRS Pub 502 for guidelines) Optometrist - • .S.initariunl t l-tcopalll 11�e1L %d • spi L 1 , . l'ooling lot pll\'sicall\ or mental)■ handicapped a. i.ill • ' 1 thcrap) 1 ■>i_.l 1111.u1un Podiatrist t • - -p, , llsal or personal insurance premiums r.':r, • •terili=,uion _legal P-, • t '-_;;.p,-:rt or \oneeti\C devices (such a, orthopedic shoes) • - Huntli!g pool for treatment of SC \ere emph ri,:i.hms o, dc aU ;al \e spinal problems • ic!: phone for the deaf l :, • Television closed capticln decoder equipment which ce} clir pl.l)s the audio part of TV programs for the deaf • , a ! bauerle' • - 1 hemp) received as medical treatment • 11, ion to lldli.;pp, l per • 1'.i!l•l'l.11 expenses It medical ripen e_ of donor or • ;r, 1.. �lr p, ti\c donor • ' "a`i, ��i\ fe�� • I1'an- port.ltion expenses for essential nicdical call 11l\ per mile plus parking) • tuition at special school for the handicapped • ; oa 101 ■`:50 Ih l 1 in ia • \o InatIons • '\la`".'icc the:-.1p\ II a\ onipanted h,. doctors pre`. ription inclil.t,Llg length of time needed and number of • \,IsCC't0171\ tr,0011,Cnt> needed • Visual alert system for deaf person • \lydl.01 • • \'itamins which require a prescription to be purchased • \1edik..ui0'?• \whli ll require 0 pre>UIpti 1n to be ptl1 11:1>Crl • \\ hccichair • \lrlllal Laic UllClltal!) 111 person unsafe when • X -rays left .1'.onr■ 7 8 Non - Reimbursable Health Care Notes Expenses Examples . • Cosmetic surgery, electrolysis, and hair transplants that are not medically necessary • Fees for exercise, athletic, or health club membership • Weight reduction program for general well-being • Swimming lessons • Stop smoking programs for general smell -being • Any illegal treatment • Dancing or pallet, e\ en if recommended h) doctor • Cost of illegal drugs c\ if physician directed • Any Jharges incurred outside of plan year even if paid for during plan )car • \ utritional '-upl.k limns Cost of rt. mcchal chases for 11011- h.tndt :,tppecl child • \laniagc . otin>ciing • 0\er- the-,_ o itit,r medication iii '•lt,anlill5 • Di ap, i r\ I_c • i tine rat e\ pc n • \1 ;1\ rnii\ clothe • Bleaching 01 teeth • 1 In„ncc charges 10 gel ails\ \erg lip frequently asl.cd questions please rokk 10 the \1SRS \\ C1) ,itc at \\W\\ msrs state nm us. L1lc r?&.\ and other helpful information is behind the Ilealtll C,nc" button `t - -4 P ' ' -1,,,t'r ‘ - ' 1"1-^ri: ' F r F 9 10 a� A At, P6 e- I-� 6v - p_a i, 3 2/ / 7 The 4s y PERAgrapk 5 ' ' .sue. i ) ) New plan designed to help pu public employees r pay for ret health care costs and more ; The . i It's no secret health care costs are rising at an cs ism, �a u; .:,; - alarming rate in America. And there's no reason ' ' ainfn � � 1�►� :' �"�; to expe that situation to change any time soon. POST RETIREMENT -°" , HEALTH CARE SAVINGS PLAN' a e oye 'T ; . For many retirees, health care is the biggest expense they face every month, often consuming union re.r 'Op � y pant should die, the funds in an account _am more than a third of their income. tives.'The a } ;.z. - : '` can be transferred to a spouse or *- �w- , How do you plan for that expense when con dependent chil an st be used to b e p in fh• w. _ ; T ;,v templa retirement? The Minnesota State reimburse health care costs on a tax -free acco is ne �+ , Retirement System (MSRS) may have the answer 4 *� gyp' ` basis. Should there be no spouse or e t: . -. —the Post Retirement Health Care Savings Plan. dependent children, the funds are dis dollar amount. o>E „; " '''' ".'” Approved by the Minnesota Legislature this persed to a beneficiary or to the individ = 7 year, the program will allow current active pub- percentage •' _. oaf's estate. Only then would they e lic employees, through negotiation, to set aside a become taxable. ' --.- .mss: °P,, part of their paycheck or other compensation to The list of allowable reimbursements is �'r,,. help defray the cost of future health care costs. '` ` ;" :'�� °_- long, and those not allowed quite short. ,, . Here's how it works. Basically, if it's medically-related •- related and 'Y <• legal, it's probably covered. � 3b t ' Aq Em �• Contributions are fax free g ' e _: Employee and employer contributions are not p i '` {` '� p � P Participation .,�_- subject to state or federal taxes. As with contri- The decision to take part in the pro- `?,: ° butions to a tax- deferred retirement plan, that gram is made at the bargaining table by :.; means contributions into the plan lower an inch- Public employees -.- :; employers and union representatives. _ , vidual's taxable income. artict atin g i :h,s. T he amount to be put in the account is p p 4 -- :. _, , Growth is tax free negotiated, hether it is a dollar amount plan will have • z or a percentage of salary. However, choice of seven. , Y t Public employees participating in the plan will - -" , �,>,.._` employee contributions, if agreed to, are - ' = = have their choice of seven different m� esnnei't ferent investmen > mandatory for all members of the bar- - .Y ^a - -i- - ' , 4- ' options —fixed interest, money market, bond options. The,in :� gaining unit to retain the tax -free status y» : market, stock index, growth share, income share of the fan. All or a ortion of sever- ments ar e adniinls -4 4 , and international. The investments are admmis- P P ance pay, unused vacation or sick leave tered by t h t e State'` tered by the State Board of I nvestment and are ,... ' can also be contributed into the plan. Board of Inve3fine ike identical to accounts available through the state's Wlule h through artici anon in the program will a are identica " l to P P p g = =. deferred compensation plan. All increases in the = :: $ - ; := - probably be a part of many future union f •- ; value of the accounts are tax free. accounts a - settlements, Ron Schweitzer, assistant • -,'i - the "st ate 4y t: Payments are fax free director of MSRS, said it is not necessary t 9 q,,- a`x?.i'4 ,f., to wait until a contract is up for renewal. deferred compensa 4 Funds in an account become available when a , -: ; "<"• , t A letter of agreement between a union tion plan.- -,- _ .. participant terminates his or her public service. local and an employer is sufficient to get - -?`� They also become available when a person the program started. - - ` begins collecting a disability benefit from a pub`;._` For individuals who are not part of a lic pension plan, is on medical leave for six bargaining unit, participation is available At ---- c:.:;.. •l months or longer, or on a leave of absence for if it is made part of a personnel ■ policy ; one year or more. '' covering ll employees subject to that �� -` ` ~ Assets in the account can be used to pay for g p y ees subj I - arrangement. The emphasis is that if it 1� k medical costs, health and long -term care insur- is available to one individual, it has to be ance premiums, and even Medicare Part B pre available to all people similarly ,� ' , ti miums. Reimbursements cover not only the par- More mformattoq employed. available at tFVIIiSI . ricipant, but also a spouse and dependent chil- More information on the program is " `-'''f `- •, =� = w dren. site, wwmsrs."Stat Wig;,;. All funds, if used for allowable medical available from MSRS by calling 800 657 ': *: -. 5757 or (651) 296 -2761, or by visiting �`' - .. expenses, are withdrawn tax free. If a narrici- ' .' ^'- New Pension Law: to Significantly 1Enlzance Retirement Savings Opportu President Bush recently signed the Economic Growth & Following is a very brief overview of the most significant pension Tax Relief Reconciliation Act (EGTRRA) of 2001 into provisions included in the law that apply to employer- sponsored law. For the first time in more than a decade, significant retirement plans such as yours: enhancements will be made to individual and employer- • Increased Deferral Limits — Employee deferral limits to sponsored tax- deferred retirement plans such as IRAs, 457, 403(b), 401(k) and other defined contribution and 457, 401(k) and 403(b) plans will be increased from $8,500 savings plans. (457) and $10,500 (401(k) and 403(b)), to $11,000 in 2002, $12,000 in 2003, $13,000 in 2004, $14,000 in 2005 and What is behind this new legislation? In simple terms, $15,000 in 2006, then indexed in $500 increments. millions of American workers are personally not saving • Increased 457 Catch -Up Limits — 457 participants enough or not saving at all for retirement. And traditional retirement income sources such as pensions and social currently may contribute $15,000 per year in the three years security aren't available to many workers and will not prior to normal retirement age. The new 457 plan catch -up provide enough retirement income for others. An limit will be $22,000 in 2002, increasing to $30,000 in 2006. underlying goal of EGTRRA is to help all workers • Additional Contributions for Workers Over Age 50 — recognize that personal savings is critical to a financially Participants age 50 or over will be able to make additional secure retirement, and that even small account balances, contributions to a 401(k), 403(b) or 457 plan: $1,000 in 2002, with the benefit of tax- deferral, compounded interest, $2000 in 2003, $3,000 in 2004, and $5,000 in 2006, then reasonable investment returns, and consistent contributions indexed in $500 increments. 457 participants may not use this over time will provide enhanced retirement security. provision during the three -year period they are using regular Most EGTRRA provisions become effective January 1, catch-up. 2002, though others will become effective in later years. • Increased Combined Plan Limits — Participants in both a However, many of the provisions expire on December 31, 457 and a 401(k) plan, or a 457 and a 403(b) plan will be 2010, at which time they revert to the current pension law able to contribute the maximum amount to each plan. In standards unless they are extended at that time. So for 2002, this would be $11,000 to each plan for a total of now., an open "window of opportunity" exists for all $22,000. Americans to take advantage of enhanced tax- deferred savings plans. • Simplified 457 Plan Distributions — When leaving service, 457 plan participants will be able to leave their money in the Employers are not required to offer all of EGTRRA's many plan without having to elect a distribution date. Payments provisions, and not all provisions are effective on January I, will be able to be requested at any time, and will no longer 2002. However, we expect that rnost employers will offer have to be taken in substantially non- increasing amounts the major enhancements such as increased contribution paid at least annually. limits and catch -up opportunities as soon as possible in 2002. BenefitsCorp /Great -West, your defined contribution • Rollovers between Various Plans and IRAs — 457 plan plan's service provider, will work with your employer assets will be able to be rolled into an IRA. Employers during the corning months to confirm and communicate sponsoring a 401(a) /(k), 403(b), 457 and /or an IRA may which provisions will become available to you and the allow their plans to accept rollovers from other 401(a) /(k), timing oftheiravailability. 403(b), 457 plans and /or IRAs. We ask for your patience and that you hold your calls, but • Tax Credits for Lower Income Savers — Participants in a urge you to watch the mail and your plan's Web site for 401(k), 403(b) or 457 with income under specified more information in the coming months about enhanced threshholds will receive a tax credit for contributing to a plan. opportunities for you to build more significant retirement Again, please watch the mail and your plan's Web site in the say ings' future months for more detailed information about the opportunities of EGTRRA! t'cstment options may be offered either through mutual funds and /or a group fixed and variable annuity issued by Great -West Life & Annuity Insurance Company For more )mplete information, including fees and expenses, you may obtain applicable prospectuses and /or disclosure documents from your registered representative Read them irefully befire investing. Securities, when offered, are offered through BenefitsCorp Equities, Inc., a wholly owned subsidiary of Great -West. Form# PensionLeeis2g01 Home i Site Map j Help I Contact Us " 444 Novo MINNESOTA STATE RETIREMENT SYSTEM MSRS Home »> Health Care Savings Plan » Questions & Answers Home HCSP Questions & Answers El General Information ® Account Online General Information Investment Dependents Refunds Transfers Online Forms Contributions Payouts Deaths Loans Fees © Health Care Plan General Information Plan Features Participation Q. What is the MSRS Health Care Savings Plan? Eligible Funds A. It is a program established to provide totally tax -free reimbursement to individuals for the payment of eligible medical expenses, based on the potential contributions of employers, mandatory employee Employer Information contributions and investment returns. Participating Employers Q. Must employers participate in this plan? Questions & Answers A. Employer participation is a voluntary process gained through negotiations between each union and employers or under personnel policies. Forms To Complete Q. Must all unions agree on programs for the plan to be established? Investment Options A. No. Each union may independently bargain benefits and /or funding • Q. Who is eligible to participate in the Health Care Savings Plan? Last Updated: 07/18/2002 A. Any active public employee in Minnesota is eligible for plan participation if covered by any of the following retirement plans: • Minnesota State Retirement System (MSRS) • Public Employees Retirement Association (PERA). • Teachers Retirement Association (TRA). • St. Paul Teachers Retirement Fund Association. (SPTRFA) • Duluth Teachers Retirement Fund Association. (DTRFA) • Minneapolis Teachers Retirement Fund Association. (MTRFA) • Individual Retirement Account Plan (IRAP) administered by the Minnesota State Colleges and Universities (MNSCU). Q. May an employee opt in or out of the Health Care Savings Plan? A. No. Internal Revenue Service (IRS) rules require mandatory participation of all employees of a bargaining unit in order to gain totally tax -free benefit payments. Q. What provision of tax law is the Health Care Savings Plan based on? A. Governmental Integral Part Trust. General Information Investment Dependents Refunds Transfers Contributions Payouts Deaths Loans Fees Contributions Q. How may individual accounts be funded? A. Through negotiated employer contributions, mandated employee contributions or negotiated benefit conversions such as severance pay, etc. Q. May employees voluntary pay additional amounts into this plan? A. No. Q. Is there a maximum amount that may be paid into an individual account, either annually or over a career? A. No. There is no maximum amount at this time General Information Investment Dependents Refunds Transfers Contributions Payouts Deaths Loans Fees Investment Options Q. May individuals direct the investment of their Health Care Savings Plan account assets? A. Yes. The following investment options are provided by the State Board of Investment. You can change your investment choices once per month • Money Market Account • Growth Share Account • Fixed Interest Account • Common Stock Index • Income Share Account • International Share Account • Bond Market Account Q. How may employees change their investment options? A. Either through our website or on an investment selection form provided by MSRS. General Information Investment Dependents Refunds Transfers Contributions Payouts Deaths Loans Fees Payouts Q. When may individual account benefits be paid to employees? A. At any age, after termination of covered public employment. Amounts must be used for reimbursement of medical care costs or insurance premiums. Q. Are there circumstances, other than termination, when employees are allowed to draw funds from their account? A. Yes. The account may pay out eligible medical reimbursements if an employee is receiving disability benefits from a Minnesota public pension plan or on a medical leave of absence for more than six months, or on any leave of absence for more than one year. Q. Must documentation for the reimbursement of health care expenses be provided by the individual to MSRS? A. Yes. Documentation may include Medicare B premiums, health plan premiums and other documented health care costs. Q. What is a reimbursable expense? A. Internal Revenue Service (IRS) Publication 502 lists the criteria of reimbursable and unreimbursable health care expenses. The Zink to download a Adobe Acrobat (PDF) version of the publication is available on our Forms page. Q. What is the minimum non - recurring health care cost that may be claimed? A. Health care expenses must be accumulated until $75 or more is accumulated for reimbursement. • Q. How often will claims for reimbursable expenses be processed? A. Weekly. Q. How will employees receive reimbursement from MSRS? A. Direct deposits will be made to member bank accounts. Q. Can employees get reimbursement for health care expenses of their spouses or legal dependents? A. Yes. Q. How much may be reimbursed to the employees from the Health Care Savings Plan account in a single claim? A. The total account value based on any unreimbursed medical expense, not to exceed $10,000 per year. General Information Investment Dependents Refunds Transfers Contributions Payouts Deaths Loans Fees Dependents Q. May employees request reimbursements for dependent medical costs? A. Yes. Dependents may also include spouse, children, grandparents and grandchildren if they meet the IRS definition of a dependent. Q. May medical reimbursement be made for a domestic partner? A. No. Federal law does not recognize domestic partner status. General lnformation Investment Dependents Refunds Transfers Contributions Payouts Deaths Loans Fees Death Benefits Q. If the employee and all other legal dependents are deceased and money still remains in the account, what happens to that residual value? A. It is paid out to a designated beneficiary or to the estate as a taxable benefit. Q. Who may be designated as a beneficiary for a death benefit? A. Anyone. General Information Investment Dependents Refunds Transfers Contributions Payouts Deaths Loans Fees Refunds 0. If an employee leaves public employment, may the account balance be refunded in cash? A. No. Reimbursement may only be paid for documented health care expenses and may be claimed any time after termination. General Information InvP.St.M.e.nt. Dependents Refunds Transfers Contributbons Payouts Deaths Loans Fees Loans Q. Ar there any provisions for Ioans or emergency withdrawals? A. No. General Information Investment Dependents F{Pfu�c1.5 Transfers Contributions Payouts Deaths Fees Transfers Q. y 4 aythoemp|oyeo'oHea|thCaroSavingaP|unn000untba|anooabo1runuhormdtoonothorhau|thoaro plan? A. No. Federal rules involved in the creation of another health care plan may be different than the criteria established for the Health Care Savings PIan. General Information bIvestmeDt P.QppncigrO F3Qfund.5. Iulp5f@rp Contributions Payouts Deaths Loan FQ@5_ Fees 0. What is the administrative fee for services? A. The current fee is 15 basis points per quarter (15 cents per $100) with a maximum of $35 per quarter. Thooa|ou|oUoniobooedonemp|oyan'uuouountba|anooat1haendof the quarter. Minnesota State Retirement System • 60 Empire Drive, Suite 300, St. Paul, MN 55103 -3000 Telephone. (651) 296 -2761, Toll Free: (800) 657 -5757, Fax: (651) 297 -5238 E -Mail: msrs @state.mn.us ? t r . 4C ° - ie,�.s er POST RETIREMENT r HEALTH CARE SAVINGS PLAN Administered by the Minnesota State Retirement System (MSRS) MSRS Legislative Authority • 1929 - The Minnesota State Retirement System (MSRS) established E 1975 - MSRS authorized to oversee the Minnesota Deferred Compensation Plan (MNDCP) Q 2001 - MSRS authorized to offer post retirement health care savings plan (HCSP) " Minn. Stat. 352.93 (2001 Supp.) • 4 Post Retirement Health Care Savings Plan .._ :..::+.°:r°••- .... - •' ° "az°..::. �.r�z:�.s:.:sr:..:.. -::..: ::•rx�__r,:;- «s.,.- ees: -: ±s:>.;«zss ® Employee (EE) can build a tax -free savings account v Tax free going in v Tax free going out E Account $ can be used to offset EE and /or dependent medical expenses upon termination of employment v IRS definition Tax-Free Pay Outs E Health Insurance Premiums E Medicare Part B (S54.00 per month.'per person) c Dental costs a Long -term care premiums a Eye care costs • Co- payments S prescription drugs a For other eligible expenses see IRS Publication 502 2 What Happens If I Die? -• - ..::iv 61:YY1:'M o'F { :�.. = ":3... •:�� ::_.__.^.... •£.:.v ::: �' y.'a '- �:'. -� ...' V Yl�_uF If you die, your spouse and dependents continue to use the account tax -free IS If you have no dependents, the account balance will be paid out to your designated beneficiary Becomes a taxable event How Do You Start Account? E Must be bargained for represented employees c2 Must be included in personnel policy for non- represented employees E Cannot be individual choice; everyone in bargaining unit or covered under personnel policy must participate as set out in agreement Creating Eligibility Criteria Vesting requirement ® Hire /start dates ✓ Employees hired on or after 7/1/2002 E Years of service • Employees with 5 -10 contribute .5% of pay; 11- 15 contribute 1% of pay; 16 or more contribute 1.5% of pay; or v Severance eligible employees Nvith 20 years of service will put 100% of severance in the HCSP Funding Sources Eligible Funding Sources • Employer paid contributions E Mandated employee contributions Ineligible Funding Source g Voluntary employee contributions 4 Examples of Eligible Funding Sources a Severance Pay Unused sick and /or vacation • Designated percentage of pay or pay increase E Lump sum contribution a Ongoing annual and/or sick leave hours - based upon an account balance E Merit pay or early retirement bonuses Severance Pay Conversion Example: (385 hrs) 50% cash - -50% HCSP Employee Saves Cash payout Convert to HCSP (taxed: red, State, FICA) (tax -free) 192.50 hours 192.50 hours x S20.00 hourly rate x S20.00 hourly rate 53850.00 gross 83850.00 gross - .40 (40% tax deduction) - 0.00 (tax -free) S1540.00 S paid in taxes 0.00 S paid in taxes 82310.00 Net S in cash 53850.00 Net S to HCSP FICA Fed: ... !'. . . .a�C Co:;tribution - AcI C 6. — o 1 oc Sec. Medicare 1 4� 'o) „aL Severance Pay Conversion Example: (385 hrs) 50% cash - -50% HCSP ..resrx Employer Saves Cash payout Convert to HCSP (taxed: Fed, State, FICA*) (tax -free) 53850.00 gross S3850.00 gross x .0765 (7.65° FICA) x 0.00 (no FICA) S294 52 Employer -paid FICA 0 00 Emplo\ er -paid FICA FIC 1 I ed :.,:i le.ur,:ace Contributions let (Soc Sec 6 2 °■, — licdicarc 1 45 Investment Information E Investment choices offered by the State Board of Investment (SBI) LI New Accounts default to the money market option until Investment selections are made EE makes investment choices v Investment returns are added to or subtracted from the account (earnings are tax - free) 6 • Investment Information (cont.) . _.._�._.�.xu- c.z.ev_.:__.:... ..u. _..1....7.na:...: =s= -r =•.^: :.. _.. _ ___ . _.. _. �.._..... _-ray la You can change your investment options once a month ix On -line or by filling out a form • You will receive account statements every 6 m onths g You can go on -line and view your account as often as you like Investment Choices Money Market a Fixed Interest a Bond Account a Income Share Account (60% stock, 35% bonds, 5% cash) a Stock Index Account a Growth Stock Account E International Account Fees E Administrative Fee n An annual fee of .60% vill be charged to EE account ET The annual fee is capped at S140 per year Funding Admin. Fee Cost to EE S1 O,000 \ .0060 = S60 per year E Investment Fee S13I's annual investment fees range from .01% to .3")% When can Members Draw From Their Account? + 7 • ' - , E Upon termination of employment E Upon retirement LE If you are collecting a disability • If you are on a medical leave (6 months or longer) E If you are on a leave of absence (one year or long.er) 8 Payout Process Bi Out -of- pocket expenses paid out weekly /Minimum pay -out $7.00 E Insurance premiums will be paid monthly ✓ MSRS will set up an automatic payment Filina the Integral Part Trust E In March 2002, we filed a request with the IRS for a ruling that would allow the MSRS to exempt individuals who can prove that they have substantial health care coverage after retirement ✓ Tri -Care eligible employees MSRS received its favorable ruling from the IRS in July 2002.