Retirement Healthcare Funding Presented By: Joel J. Babbitt, Benefit Coordinator, VEBA Administrator NPPFA Benefits

What’s Going On?

Pre-age 65 Retirement? Pre–Medicare healthcare premiums run from $600 to $1,900 per month for public sector employees in Illinois Healthcare premium are paid with After-Tax dollars

I Need How Much? A 65-year-old couple retiring in 2016 is estimated to need $260,000 to cover medical expenses throughout retirement according to Fidelity Investments.® Long-Term Care Insurance Could Add an Additional $130,000

What about Pre-65? If you retire at age 55, you will need an additional $192,593 to get only you to age 65 with only modest 3% annual healthcare premium increases

“Typical” Pension Check $80,000 Salary x 30 YOS = 75% Pension Pension = $5000 / month Monthly Gross Pension Check $5,000 Taxes Withheld $1,000 Net Check $4,000 Health Insurance Premiums Withheld $1,400 $2,600

What Do These Plans Do? Tax-Free In (Contributions) Tax-Free Growth Tax-Free Out (Distributions for Covered Benefits) Reduces Taxable Income Medicare Taxes Social Security Taxes if Applicable Triple Tax Free!!

Retirement Healthcare Funding IRC Section 115 Trust VEBA HSA

115 Trust Started in 1999 Funds are the asset of the Municipality Authority comes from Private Letter Rulings Available to pay medical expenses, including premiums, deductibles and co-pays.

VEBA Funds are the assets of the Employees’ A “VEBA” is a Voluntary Employees’ Beneficiary Association Since 1928 Funds are the assets of the Employees’ An independent formal trust organization

VEBA Types: Contributions can be made by: Defined Benefit (Pooled fund) Defined Contribution (Individual account funds) Blended plan Contributions can be made by: Employer which are tax deductible Active employees as part of a union contract Available to pay medical expenses, including premiums, deductibles and co-pays.

HSA No, with the following three exceptions: Can I use my HSA to pay for health insurance premiums? No, with the following three exceptions: if the HDHP premium is part of a COBRA continuation coverage, if you (the HSA owner) are currently receiving unemployment under a state or federal program, and if the HSA owner is over age 65 and using the HSA to pay for Medicare or an employer sponsored health plan.

HSA If you are age 65, are Medicare Part D premiums covered? Yes, If you are age 65, premiums for are covered for you, your spouse and your dependents for qualified medical expenses.

How Are These Plan Funded? Employer Contributions Flat Dollar Percent of Pay Sick Time Comp Time Bonus Longevity Pay

Example 1 Every firefighter is contributing 40 hours of sick time pay The employer is contributing $750 per year At retirement, the firefighters unused sick and vacation time is cashed out in their account

Example 2 When the firefighters sick bank accumulates over 400 hours, all hours over 400 are deposited into the VEBA at 100% of value. Upon retirement, all accumulated sick day and vacation time automatically is deposited into the VEBA within 30 days of retirement.

Example 3 1% of Salary 100% of Vacation and Sick Time at end of career

Other Possible Plan Features One-Time Lifetime opt-out at start up of plan If an employee is promoted out of the bargaining unit, he shall remain a member of the Plan.

Win-Win Win-Win Triple Tax Free Employer saves payroll taxes Basically a FSA for retirement without the use it or lose it feature Discourages the abuse of Sick Time

Implementation Once its in your Collective Bargaining Agreement, your vendor will handle the paperwork with your employer.

Win-Win Allows you the ability to retire earlier Inexpensive to set up and administer

Retirement Benefits Joel J. Babbitt, CLU NPPFA Benefits joelb@nppfabenefits.org