Saving for medical care
In light of recent news stories about local and state governments struggling to pay for retirees’ promised benefits, Lincoln and Lancaster County, Neb., appear to buck the trend. For several years, the city and county, which share a personnel department, have been socking away money each pay period in individual investment accounts specifically for employees’ health care expenses. The money is contributed to a trust account that employees can draw from tax-free for qualifying medical bills during retirement or after they stop working for the local governments.
John Cripe, compensation manager for the personnel department, first learned of the investment vehicle in the mid-1990s at a police and fire pension investment seminar. Technically, the program is a voluntary employees’ beneficiary association trust — 501(c)(9) under the IRS code — which was created in 1928 for unions and extended to public service employees in 1986. In Lincoln and Lancaster County, it is known as a Post-Employment Health Plan (PEHP). “It’s an opportunity for an employer to put away tax-free — not tax-deferred — money into a trust account on behalf of the employee for future medical expenses,” Cripe says.
In 1997, the city and county began offering the program to two groups of employees. As the local governments’ eight employee bargaining groups renegotiated benefits over the next five years, each considered adding the plan. For groups that choose to participate, the local governments deduct a flat dollar amount — ranging from $20 to $50 — from their negotiated salary increases before taxes and deposit it into their trust accounts, which are held by Columbus, Ohio-based Nationwide Retirement Solutions.
When employees retire or otherwise stop working for the city or county, a portion of their unused sick leave pay also is deposited tax free into the trust. Before the local governments offered the plan, they would pay the employee that money directly and, therefore, would pay Social Security taxes and contribute to pensions based on the amount. The employee’s typical taxes also would be withheld from the total.
“It’s easier for us to make the contribution, and the employee gets more money to spend on their health care,” Cripe says. “Really, it became a pretty good trade for us, and it’s been an extremely good instrument for us to help employees look down the road for their future medical expenses.”
Recently, the city and county removed the cap on the number of unused sick leave hours they would pay employees and increased the percentage of sick leave pay they give employees at separation. Now when employees retire, they are paid for one-half (rather than one-fourth) of their unused sick days, which accumulate every year. The move rewards employees who do not use their sick days and sends a larger payment to their PEHPs. “They’re looking down the road and saying, ‘We know that health care is a tremendous expense, and we want people to have the opportunity to pay for their health care and not have to continue working ‘til they’re 65, worrying about premiums,” Cripe says.
This year, the personnel department renegotiated its contract with employees in the American Federation of State, County and Municipal Employees bargaining group and agreed to provide incentives for early retirement. Starting in January, employees who choose to retire early will receive sick leave payouts worth 65 percent of their balances and $15,000 cash — both of which will be deposited in their PEHP accounts.
Lincoln and Lancaster County contribute approximately $1.6 million annually to employees’ PEHP accounts. Similar to a 401(k) or 457 deferred compensation plan, employees direct how the money in their accounts is invested. They can use the money for prescriptions, co-payments, long-term care insurance and even COBRA health insurance. “It really [is] something that is extremely attractive for folks that are looking to help employees with their future health care costs,” Cripe says. “They’re going to do nothing but go up.”
