A new tool to manage post-retirement healthcare
by John W. Rownd, CFC,.Mr. Rownd is vice president for product management at HSA Bank. Visit hsabank.com
With the increasing and often unpredictable costs of providing defined benefit (DB) plans during retirement, employers offering retiree benefits can better control their expenses by offering a cost-effective retirement health benefit solution—a retiree reimbursement arrangement (RRA). RRAs are set up by an employer to help pay the medical expenses that their employees incur after they retire and represent a better alternative to group retiree medical plans.
At a time where healthcare has become a large point of focus for Americans, RRAs offer peace of mind to retirees who are worried about paying for medical expenses during their “golden years.” According to the 2021 HSA Bank Health & Wealth IndexSM, 93% of consumers over the age of 55 are concerned about paying current or future medical bills. Of those polled, more than one-third reported that they rarely save money for future healthcare expenses. By setting up an RRA, employers can help alleviate employee worries over their financial future while also gaining an edge over competitors when it comes to retaining and acquiring talent.
What is an RRA?
By legal and regulatory definition, an RRA is a Health Reimbursement Arrangement (HRA) provided to a retiree by their employer in retirement. The employer can offer a fixed or variable dollar amount to a company retiree and determines the coverage(s) they want to reimburse. RRAs afford employers broad flexibility to design reimbursement arrangements to best fit the needs of their retirees.
Typically, Medicare Advantage and Medicare Supplement plans are reimbursed. In some cases, the employer’s contribution to an RRA can cover all eligible healthcare costs for the retiree and in others, the retiree must cover the difference. Some employers work with consultants and actuaries to determine their share of the contribution and find an optimal cost. Employees can only access the fund post-retirement. The full list of approved tax-deductible expenses can be found in the Internal Revenue Service (IRS) Code Section 213D.
A History of Retirement Savings
In the past, DB plans, or pensions, were the main source of payment for a retiree’s medical expenses, offering employees more retirement security than before. A DB plan is an employer-sponsored retirement plan where employee benefits are typically calculated using a formula that considers various factors, such as length of employment and salary history. However, they are often not financially sustainable for most employers, especially for smaller companies.
According to the IRS, a DB plan is the most administratively complex and costly type of retirement plan. It cannot be changed retroactively, therefore, benefits cannot be decreased by the employer once a particular amount has been allotted. An extra tax also applies if the minimum contribution isn’t met or if excess contributions are made to the plan. The costs of fixed benefit plans, along with these restrictions and inconveniences led to a change in plans to one where employers provided fixed contributions rather than providing fixed benefits.
The Shift from DB to DC Plans
After the introduction of the 401(k) in 1978, and additional rules in 1981 allowing for payroll deduction contributions, the adoption of defined contribution (DC) plans rapidly expanded. By the early 1990s, employers had overwhelmingly adopted DC retirement plans, such as 401(k)s, as a better way to control their costs. DC plans allow employers to contribute a fixed cost or percentage to a retirement plan in which employees also contribute a percentage of their pay that is intended to fund their retirements. This achieves a more predictable and manageable investment to employers while providing powerful retirement savings capabilities to their employees. The same concept applies to health plans, especially those being offered in retirement.
RRAs provide solutions to the problem of cost, flexibility, and security that employers face with offering health benefits to retirees. RRAs allow flexibility to take into consideration that every employee has different medical and retirement needs. RRAs have become a popular option over the past decade as employers sought to better control their expenses but still wanted to provide retirees financial assistance for medical costs and greater peace of mind.
As employers who don’t offer RRAs look to move their retirement health benefit solution over, employers need to be aware of the sensitivities that employees may have when it comes to touching their current benefits. Employers are encouraged to have a plan or strategy in place ahead of the transition and over-communicate every step of the process.
As more American employees face concerns about retirement, employers should consider the more cost-effective and custom approach to retirement savings that RRAs can provide. Learn more about this unique solution and how HSA Bank can help here.