MEMO TO: Members of the City Council
FROM: Mayor John Marchione
SUBJECT:
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Approval of the Establishment of the Health Reimbursement Arrangement (HRA) Voluntary Employees’ Beneficiary Association (VEBA) Accounts for Employees and the Use of Reserves in the Medical Self-Insurance Fund to Support the New Accounts
I. RECOMMENDED ACTION
recommendation
Approve establishing Health Reimbursement Arrangement (HRA) Voluntary Employees’ Beneficiary Association (VEBA) accounts for employees based on eligibility requirements and the use of reserves in the Medical Self-Insurance Fund to support the new accounts.
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II. DEPARTMENT CONTACTS
Malisa Files, Finance Director
Cathryn Laird, Interim Human Resources Director
Nicole Bruce, Benefits Manager
III. DESCRIPTION/BACKGROUND
A health reimbursement arrangement (HRA) voluntary employees’ beneficiary association (VEBA) is a tax-exempt trust instrument that provides employee benefits and is authorized under Internal Revenue Code section 501(c)(9). A HRA VEBA is a benefit plan that reimburses out-of-pocket medical care and premium expenses.
As reported for several years, the City’s Medical Self-Insurance Fund is carrying excess reserves of approximately $5 million. The Employee Benefits Advisory Committee (EBAC) is proposing to use the funds to establish HRA VEBA accounts for eligible employees (see one-pager in Exhibit A). Eligible employees are those employees that were covered under the City’s medical plans for the past five years (January 1, 2014 through December 31, 2018). Employees will receive a one-time pro-rated share determined by the number of months the employee was covered by the City. Eligible employees must also have been in active status on December 31, 2018.
A. Analysis
The Medical Self-Insurance Fund has been accumulating excess reserves due to conservative actuarial analysis as well as underutilization of the plan. The Fund currently holds approximately $10 million in fund balance. An estimated $5 million is needed for reserves of which $2 million is reserved for incurred but not reported (IBNR) claims and $3 million to guard against fluctuations in medical premiums.
Redmond has been working to buy down the reserves through keeping rate increases small or at zero. The minimal rate increases have served to curtail the growth in the reserves, but it has not worked to decrease the excess reserves.
For several months, EBAC had discussed potential one-time benefits to employees to buy down the excess reserves. Several ideas were researched and it was agreed that HRA VEBA accounts were the most viable option. HRA VEBA is considered one of the best ways to cover out-of-pocket medical care costs for several reasons:
• HRA VEBA contributions, earnings and withdrawals are tax free
• HRA VEBA accounts can be used to cover medical premiums before and after age 65
• The balance of the accounts carryover from year to year
• Participants have diverse investment options
• HRA VEBA contributions can be used for co-pays, deductibles, prescription drugs and other medical expenses
On the employer side, Redmond would make a one-time contribution to the HRA VEBA accounts, but would not bear the ongoing cost of a benefit enhancement while at the same time giving employees a mechanism to save for medical expenses. Employee groups could choose to fund additional contributions through other mechanisms (e.g. salary deduction, sick leave bonus, etc.).
IV. PREVIOUS DISCUSSIONS HELD
Previous discussions have been held with the Finance, Administration and Communications Committee of the Whole, including:
• September 25, 2018
• February 26, 2019
Staff has also reached out to individual Councilmembers to answer questions regarding the proposed plan.
V. IMPACT
A. Service/Delivery:
Funding HRA VEBA accounts for employees has several advantages, including:
• Provides the mechanism by which employees can save for post-retirement health care costs.
• Allows the City to stabilize the Medical Self-Insurance Reserves at an appropriate level.
• The funds are tax free.
• Employees can choose how the funds are invested.
• Unused balances from the accounts carry over from year to year.
• Funds can be used for eligible medical expenses under the IRS Code including payment of health care premiums and deductibles.
B. Fiscal Note:
Once Council has approved the establishment of the HRA VEBA accounts. A total of approximately $5 million from the Medical Self Insurance Fund will be used to fund, on a one-time basis, employee accounts. To the extent, employee groups decide to make ongoing contributions to their accounts, the City could benefit from payroll tax savings.
VI. ALTERNATIVES TO STAFF RECOMMENDATION
Council can choose to:
• Approve the plan as described.
• Approve the plan with changes.
• Reject the plan. The proposed funds would remain in the Medical Self-Insurance Fund and the HRA VEBA accounts would not be established.
VII. TIME CONSTRAINTS
The City plans to fund employee HRA VEBA accounts by May, should Council approve the change in benefits and the transfer of money.
VIII. LIST OF ATTACHMENTS
Attachment A: HRA VEBA One-Pager