Alternatives to Cash Payout of Accumulated Sick Leave Presented By: Ken Zastrow Market Development National Insurance Services School District of Holmen

2 Current Practices Holmen Policy Pros and Cons Alternatives Definition of HRA and 403(b) HRA vs. 403(b) Pros and Cons Examples Questions

Current Sick Leave Payout

4 Current Practices Accrued Sick Leave Teachers with at least 15 years of continuous “qualified service” in the district and at least 55 years of age. Accrued sick leave is paid at 0.15% of the retirees contract rate for each day of accrued leave (ex. $45,000 salary X 100 days X 0.15% = $6,750) Cash payment is made by January 15 th of following calendar year. Pros Money can be used for any purpose Cons Payout is counted as income 7.65% FICA applies for both Employer and Retiree Retiree is subject to all taxes (FICA, Federal, and State) Retiree has to wait until following January to receive payout

5 Alternatives Better: Employer Sponsored 403(b) ER and EE Permanently save FICA Tax-deferred (Federal and State Income Tax paid at time of distribution) Funds can be used for any purpose Interest earnings help increase the value of the benefit Best: Health Reimbursement Arrangement Completely Tax Free No FICA, No Federal or State Income Tax Funds can only be used for eligible medical expenses Interest earnings help increase the value of the benefit

6 Retiree Only HRA vs. Employer Sponsored 403(b) Retiree Only HRAEmployer Sponsored 403(b) Tax-freeFederal and State income tax at the time of distribution Can be used for eligible medical expensesCan be used for anything No limit on post-employment contribution years; no contribution limits Contributions can only be made for up to the first five post-employment calendar years; 415(c) limits Surviving spouse and eligible dependents can continue using the HRA upon the death of the participant Name beneficiary; funds are never forfeited Does not allow for additional premium tax credit Included in household income and could effect premium tax credit calculation Access must be suspended if rehired and eligible for benefits Access prior to 59½ must be suspended if rehired and working more than 20%

7 Separation Payment $1,000 Cash FICA Tax ($56.50) Cash $ Cash Subtract income tax in PRE- retirement tax bracket $ Cash Separation Payment $1,000 HRA FICA Tax ($0) HRA $1, PLUS INTEREST HRA Subtract income tax in POST- retirement tax bracket $1, HRA Separation Payment $1,000 TSA FICA Tax ($0) TSA $1, PLUS INTEREST TSA Subtract income tax in POST- retirement tax bracket $ TSA

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