US Mayor Enterprises News: Planning For The Future -- Together

With the approach of the new century, the financial press is filled with discussions about the impact of the baby boomers' retirement. Are people setting aside enough for retirement? As baby boomers live longer than their parents' generation have they planned for this longevity? Will increased age translate to increased demand for nursing homes and medical care? Will a fifty-year-old today be able to afford to retire at 65?

Many city employees determine their retirement date by the value of their health benefit. For example, a city employee considering early retirement must factor in the cost of medical insurance after leaving employment. This cost can often double or triple upon separation from service. For a fully vested employee, this may translate to $400-600 per month for medical insurance.

Long-term care is receiving more attention as the baby boomers move toward retirement. Although less than 5% of the adult population ends up in long-term care, the impact on a family's assets can be devastating. With costs approaching $120 per day, skilled nursing for long periods of time can wipe out all savings. Consequently, employees are investigating the advantages and costs of long term care policies as a benefit. Human resource managers are also investigating a whole series of health-related services for employees.

Post-Employment Health Plan

A post-employment health plan may be the answer for many cities. This plan provides a tax-free method for setting aside assets to pay for health and long-term care costs after employment. The funds set aside under such a program are contributed FICA-free by the employer and accumulate earnings tax-free for the employee. When the employee uses the funds, they remain tax-free.

How does the program work? An employer must implement the plan. The employer may discriminate by class of employee; however, every employee within the class must be given the benefit. The employer sets aside a specified amount of money each pay period in the employee accounts. This may be a percentage of payroll or a specific dollar amount. The funds are held in trust and the employee directs investments of the fund based upon a series of investments provided by the plan administrator. Funds within each employee's trust account grow through earnings and regular contributions.

When an employee separates from the city either through retirement, lay-off or transfer, the employee may used the accumulated assets within the account for any qualified medical purpose, including health insurance premiums, COBRA payments, prescription drugs, hospitalization and long-term care. An employee may not use the funds for non-qualified expenses.

Since the funds may be used to pay premiums for health care, the city employee may choose to remain within the city health plan after separation from employment. The employee may also decide to purchase individual or other group coverage. Likewise, the employee may use the funds to pay for long-term care or pay premiums for long-term care insurance.

The Post-Employment Health Plan (PEHP) has been called a "win-win" for city employees and city government, since it benefits both. The employee gains a guaranteed savings account for future health costs and the city gains a savings benefit from the FICA deductions it receives for contributing to a PEHP.

Cities interested in learning more about the Post Employment Health Plans should contact US Mayor Enterprises' Kathryn Kretschmer or Roger Dahl at (202) 293-7330, or call their Nationwide Retirement Solutions (formerly PEBSCO) representative.