Copyright 2008 Gale Group, Inc.All Rights ReservedASAPCopyright 2008 International City-County Management Association
Public Management
July 1, 2008
SECTION: Pg. 3(2) Vol. 90 No. 6 ISSN: 0033-3611
ACC-NO: 184267081
LENGTH: 964 words
HEADLINE: IRS ruling raises issues of fairness for beneficiaries; ON RETIREMENT
BYLINE: McCallen, Joan
With health care costs at record heights, many employers have adopted health care savings account programs that will help their employees put away extra dollars to meet the soaring expenses of health careduring retirement.One feature of some plans allows the beneficiaries named on the account to enjoy the same tax advantages as the employee, as long as the dollars are spent on qualifying expenses. For many employers and their employees, this security feature is an important incentive to save for retirement health care.A recent ruling by the Internal Revenue Service, however, will significantly affect who qualifies as a beneficiary--and consequently raises significant issues of fairness. Under the ruling, the IRS would basically prohibit employees from designating their live-in brothers or sisters and other relatives, domestic partners, and even a non-dependent child from being named as beneficiaries. Two companion bills introduced last year into the U.S. House and Senate with bipartisan support would correct this situation as well asother related issues of fairness. The House bill (H.R. 1820, the TaxEquity for Health Plan Beneficiaries Act) was introduced by Rep. James McDermott (D-WA), and the Senate bill (S. 1556-the Tax Equity for Health Plan Beneficiaries Act) was introduced by Sen. Gordon Smith (R-OR).The 2006 Revenue Ruling (2006-36) stated that plans may no longer allow reimbursements from health reimbursement arrangements (HRA) to non-spouse, non-dependent beneficiaries after December 31, 2008. (Theruling permits payments until then.)As an HRA, ICMA-RC's Retirement Health Savings (RHS) is affected by the ruling, as are other HRA programs from other providers. The IRSrevenue ruling prevents employers from offering the non-spouse, non-dependent beneficiary reimbursement benefit to their employees, even if the employers want to.A number of public sector employers, who adopted RHS programs withthe understanding that this benefit was permitted, are concerned about the restriction now imposed by Revenue Ruling 2006-36. The interpretation of the regulations has important implications for public sector workers.Public employers concerned about this issue may want to contact their representatives to encourage them to address this situation by backing legislation that is now before Congress.A BRIEF HISTORY OF RETIREMENT HEALTH SAVINGS PLANSRHS plans have been adopted by employers to meet the growing impact of health costs on retirement and to respond to requests from employees for a means to prepare for this expense. Recent studies have estimated that an average couple retiring today will need about $200,000to cover their health care costs for 20 years in retirement, not including the expense of long-term care should they need it. The costs are essentially the same regardless of the income level of the couple when they enter retirement.Currently, some public employers are paying for the costs of health benefits for their employees, but an increasing number are moving to defined-contribution types of accounts to relieve their balance sheets of the obligations such benefits impose.These defined-contribution plans allow employees to set aside dollars pretax through various elections with the added benefit that the funds are never taxed if used for health expenses inretirement. Employers are also allowed to provide certain contributions to these programs.WHY SAVING THIS FEATURE IS SO IMPORTANTOne of the advantageous features of the RHS plan is that the fundsremaining in the account after the death of account holder can be used for health expenses by beneficiaries, with the same tax advantages. This feature provides a good source of security for the beneficiary.The recent IRS revenue ruling, however, effectively undercuts thissupport for those beneficiaries who are non-dependents and non-spouses. The legislation that has been introduced in the House and the Senate would restore plan provisions to pay out the benefits to this group, meeting the original intent of these employers.WHAT YOU CAN DO TO HELPBoth bills are in the first phase of the legislative process and have been referred to their respective congressional committees, wherethey are still awaiting hearings. The bills have wide-ranging bipartisan support as well as significant endorsement from the private sector. In fact, 53 percent of Fortune 500 companies provide health coverage for such domestic partners and have asked for equitable treatmentof these benefits.Public sector employers that support equal treatment under HRA plans should contact congressional representatives from their local areas to urge passage of this legislation. As a matter of fairness, we atICMA-RC are working with plan provider organizations to seek to retain the right of public sector employees to leave their retirement health savings benefits to whomever they choose.--Joan McCallenPresident and Chief Executive OfficerICMA Retirement CorporationWashington, D.C.
www.icmarc.org
This article is intended for educational purposes only and is not to be construed or relied upon as investment advice. The ICMA Retirement Corporation does not offer specific tax or legal advice and shallnot have any liability for any consequences that arise from relianceon this material. It is recommended that you consult with your personal financial adviser prior to implementing any new tax or retirementstrategy. Vantagepoint securities are sold by prospectus only, and the prospectus should be consulted before investing any money. Vantagepoint securities are distributed by ICMA RC Services, LLC, a broker dealer affiliate of ICMA-RC, member FINRA/SIPC. ICMA Retirement Corporation, 777 North Capitol Street, N.E., Washington, D.C. 20002-4240; 1-800/669-7400; www.icmarc.org. AC: 0508-2156
LOAD-DATE: September 3, 2008
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