Episode 60 – Strategies and benefits of VEBA, a health reimbursement arrangement (HRA)
Episode transcript:
[music intro]
Jenny
Welcome back to Fund Your Future with DRS. Now, when you separate from public service, either to retire or to go work in the private sector, you might have the option to cash out your vacation leave and sick leave. And depending on where you work, these cash outs could be paid out to you in an account for medical expenses that can be used in the future.
And there’s quite a few advantages to doing this. It’s a great program, and we’ve invited Brian on the show to tell us a bit more. So welcome, Brian.
Brian
Thanks, Jenny and Seth. I’ve listened to quite a few podcasts in my day, and this is my first time actually being on a podcast, so I appreciate the opportunity here.
Jenny
That’s perfect. Yeah. So just to start, can you tell us a little bit about the work that you do? So, you work for HRA VEBA and tell us a little bit about this program and kind of what those acronyms stand for.
Brian
Yeah, for sure. I’ve been working with VEBA plans for the past 20 years. We work with public employers and employees to help them save for their health care expenses. And what most people think of is HRAs and VEBAs as an account to help cover retiree health care expenses and premiums.
And of course, the IRS likes to use acronyms. HRA stands for Health Reimbursement Arrangement. And I’ll tell you what VEBA stands for. It’s not going to explain a whole lot. I didn’t come up with the term. It’s the IRS but, stands for Voluntary Employees Beneficiary Association. And it’s basically a type of hold the benefit dollars.
Seth
So Brian, we’ve had some folks on the podcast previously to talk about, health savings accounts or, flexible spending accounts. Could you explain to us how, these HRA and VEBA accounts are different than health savings accounts or flexible spending accounts?
Brian
Yeah, it’s kind of an alphabet soup, but lots of acronyms. They’re all tax-advantaged health accounts, that have different rules. So, I think they’re all good plans. They all just have a different kind of niche.
I’ll start with HRA, or VEBAs. HRAs are technically funded by the employer, or by mandatory employee contributions. And the most common way that the VEBAs are funded is going to be with a sick leave cash out upon retirement. And depending on where you work, there may be other funding methods in place, such as monthly contributions or annual contributions.
HRAs can be used during employment. If you have an account during employment and can also be used in retirement. HRAs are most often used for co-pays, prescriptions, deductibles and then of course retiree premiums and Medicare supplement premiums.
Now moving on to the HSA health savings account, it’s a little bit different. To contribute to an HSA, you must be covered by a high deductible health plan: HDHP. Or sometimes it’s called a CDHP, consumer directed health plan. And you’re allowed to contribute $4,300 if you’re, just cover yourself or $8,550 if you’re covering a family. And you can use the HSA for things like co-pays or prescriptions, but generally not for retiree health insurance premiums.
And then moving on to flexible spending accounts, or FSAs. That’s another type of account employees can use. The FSA can be used by active employees for this year’s out-of-pocket health care expenses. So, FSAs are use-it-or-lose-it plans for employees to use the funds that year. And then you have a grace period to use the money into the next year, or a certain amount that you roll over into the next year, but generally be just for that year’s health care expenses.
Jenny
Yeah. And then so kind of switching back gears to, of course, HRA that we’re talking about today, if folks are kind of at that point where maybe they’re getting ready to retire… or I think a lot of times people think that HRAs, it’s just for those who are getting ready to retire, but it’s also for those who are just separating from public employment. Right?
And how would someone, if they wanted to enroll in this program and roll over their annual leave or vacation leave, how do they enroll?
Brian
Okay. Yeah. Good question. In most cases, the employer would involve the employee when they become eligible for a contribution. So for many people, that’s going to be upon retirement or upon separation. Or if someone works, let’s say a city or county where they’re getting ongoing monthly contributions, that the employer would enroll them when they’re eligible for that contribution.
Jenny
Okay. They would need to talk to their HR department and say, “hey, I would like to take advantage of this program to be able to rollover my vacation, leave.”
Brian
Exactly.
Seth
And Brian help me [understand]. We didn’t prep this question, but I know I’ve had some questions from people who are close to retirement. And they’ve said something like their employer takes a vote or like the people who are eligible for VEBA take a vote. Does that sound familiar to you as far as how employers decide whether or not they’re participating in these programs?
Brian
Yeah. So, it stems from the IRS rules on these plans. Basically, the big rule the IRS has is that there’s no individual choice. So, a group might vote on this. So, yeah, very common to have those who are eligible for the contribution vote on this. You know maybe annually, or every couple of years.
Maybe they bargained for the contribution or maybe just part of their policy, that they participate. So there’s different ways to decide to participate. But the big rule is that it’s something that the employer or the group would decide on in a vote is very common.
Seth
That’s helpful and makes sense. And I think to Jenny’s earlier question is really why you want to go talk to your employer: “Do you have this available? Is this something that is going to be that you’re going to use when you retire?” Some employers may have it. Some employers may not. DRS can’t tell you whether or not your employer is participating. So yeah. That’s really helpful.
And then so let’s say the employer is participating. A person is about to retire, they’ve got a balance of their sick leave that they’re going to cash out and move into this HRA VEBA account. Can you just tell us like the mechanics of how that works generally?
Brian
Yeah. So, let’s take an example of let’s say a state agency employee. So, state agencies, the only way they participate in VEBA currently is with the sick leave cash out in retirement. So, let’s say you have an employee who’s, you know, state agency employees are eligible for 25%, sick leave cash out, of unused sick hours when they retire.
So, let’s say someone has 1600 hours of sick leave. He would end up getting a cash out, for 400 hours and 400 hours, times daily rate, excuse me, hourly rate. So let’s say in this example, hourly rate is $40 an hour. That would be about a $16,000 account. So tax-free that he could use for health care expenses, premiums, co-pays, things like that. And having VEBA in place, you don’t pay income tax or payroll taxes.
So, you know, going back to this example, $16,000 sick leave cash out; if for some reason VEBA was not in place and he just took that as taxable wages he would probably end up getting somewhere closer to $11,000 after those taxes are taken out.
Jenny
That’s significant.
Seth
Yeah, that’s really significant. And you know, in your example, $16,000 could go a long ways if you’re using that just to pay your medical premiums. I’m forgetting what the state Health Care Authority premiums are off the top of my head, but I think for people who are over 65, it’s a couple hundred dollars a month. $16,000 could have a significant impact on how long you’re able to cover those premiums.
Jenny
Yeah. And I guess it kind of goes well with our next question. Once you retire, you have this account with HRA. Say there’s $16,000 in there. Can I then put more money into that account after I’m retired?
Brian
Yeah. So as far as how money’s contributed, it’s generally contributed only as you’re working or as you retire. You’re not allowed to just add your own funds to the account. There’s an exemption for that, with, with Cobra. So, if you’re getting a monthly contribution. Technically under Cobra, you can continue that same monthly contribution. But there’s not much of a tax advantage, to doing that. So short answer is, you would not contribute to it on your own.
Seth
Are these accounts invested or are they just a savings account? What sort of…yeah, how is the account held? I think you mentioned in trust or kind of early on in the conversation, but I’m curious what control a person might have over how the account could grow or shrink.
Brian
Yeah. So, there are some investment options. There are some pre-mixed portfolios, and there’s four of those participants can choose from. And then there’s some individual asset classes where they can build their own portfolio. So, if somebody wants to invest more conservatively, just kind of, you know, not have the ups and downs of the market, you could do that.
Or if you wanted to invest a little more aggressively and, you know, maybe have the ups and downs of the market and we could do that as well. There’s a default fund. So whenever an employer enrolls someone automatically their funds are going to be in the conservative pre-mixed portfolio, but they can always go in and change that.
So, you can make changes once per calendar month. And if employees or retirees are curious about what the different funds are with the returns have been, they go to their plans website, which is either be VEBA.org, support for state agencies, school districts and higher-ed that’s VEBA.org.
And then HRAVEBA.org for cities, counties and special purpose districts. And we list all the investment options and what the returns have been in the past.
Jenny
That’s great. And then can you talk a little bit about… I believe I understand that it’s not like a “use it or lose it” program. Back to our previous example, let’s say I’m retired, I have this account now of $16,000. I don’t have to use that money right away. Right? I could just keep it for later and kind of let it grow within the portfolio. Right?
Brian
Yes. That’s correct. There’s no timeframe on using the account. So some people retire, they start using the account right away. Some people might let it sit there for a few years and then start using it. Or for employees who have an account as an active employee. Some start using it right away and some say I’m not going to touch that until I retire.
So really, the account is going to stay with you until you exhaust all the funds. So that’s true. You leave the state, leave the country, that account stays with you until all the funds are used up.
Seth
That’s great. You mentioned early on in the conversation, I think that this is a tax advantaged account. So if a person uses this money to pay for a medical expense or to cover their premiums or meet their deductible or something like that, is that then taxable income? Could you explain a little bit without obviously without giving tax advice to folks, but just how that process works.
Brian
Yeah. So the VEBA, it’s fully tax-free. So the money goes in tax-free or pre tax. It could grow tax-free with investment earnings. And then as you pull the money out, that comes out tax-free as well, to cover health care expenses. So I know most people here, they think of the term “tax deferred” more often, where you’re deferring income tax. But with VEBA, it’s not taxed ever. So it’s tax-free versus tax deferred.
Seth
That is helpful context. I think you’re right. A lot of us are used to thinking tax deferred. And so really tax-free is a bigger bonus. So that’s great.
Jenny
Yeah. And then when folks do go to use the money, can they just use it for themselves, or can they also use this money for, their spouse or their children? Right?
Brian
Yeah, they can use it for themselves, their spouse and their dependents and dependents include adult children up to age 26.
Jenny
That’s great. And then maybe if you could talk a little bit about the logistics of once people go to use the money. Do they have to file a claim? Is there a benefits card? All those kinds of, logistic questions.
Brian
Yeah. So the answer is yes, yes and yes. So lots of different ways to use the account. I think the easiest way, in my opinion is to set this up as an automatic premium reimbursement for ongoing insurance premiums. So you pay the premium yourself, maybe out of your pension check or bank account, and you can set up your VEBA to automatically reimburse yourself for all or a portion of those ongoing monthly premiums.
So, it’s nice because you can set it up just once and then VEBA can just automatically send you that money each month. When you initially set that up, you would need to provide some documentation that shows what your monthly premiums are. So whether it’s through Health Care Authority or whether it’s a Medicare supplement plan or Medicare Part B, you can set that up and have VEBA automatically reimburse those premiums.
There is a benefits card as well. So this is a great way to pay for things like your co-pays and your prescriptions. Or you just swipe the card to pay for that expense. We do tell you to hold on to your documentation, just in case. Because there are some scenarios where we need to see that documentation. And we would let you know right away if we do need to see that documentation.
But you can also submit claims. So you can submit those online or through a mobile app or paper form if that’s your method of doing things. But you show some documentation that shows you incurred that expense. So something like a explanation of benefits or EOB from the insurance company. That’s usually the best form of documentation to send in when submitting a claim.
Jenny
That’s awesome. I’m glad that they make it super easy. There’s an app. There’s the benefits card just to be able to use that money. And like you said, just track your expenses and just in case anything ever comes up for sure.
Seth
So, Brian, you mentioned a couple of websites earlier on in the conversation, but can you just remind our listeners if they have more questions about what these programs are, how they work, what the investment lineup would be like in anything related, where they would go?
Brian
Yeah. So for if you work for a state agency, school district or higher ed, you go to VEBA.org, v-e-b-a dot org. And then if you work for a city, county or special purpose district, like the fire district, you go to the HRAVEBA.org
Jenny
Gotcha. And of course, ask your HR department. Yeah.
Brian
Yeah. Yeah, exactly. They know all the answers too, so definitely check with them.
Seth
Great. Thanks for joining us today, Brian.
Jenny
Yeah. Thank you so much.
Brian
You’re welcome. I appreciate it.
[music outro]
Disclaimer
Thanks for listening. And now we’d love to hear from you. What topics would you like to hear about? What questions do you have for us? Send an email to drs.podcasts@drs.wa.gov that’s drs.podcasts@drs.wa.gov. The Department of Retirement Systems provides this podcast as a public service, but it’s neither a legal interpretation nor a statement of DRS policy.
References to any specific product or entity do not constitute an endorsement or recommendation. The views expressed by guests are their own, and their appearance on the program does not imply an endorsement of them or any entity they represent. Views and opinions expressed by DRS employees are those of the employees and do not necessarily reflect the view of DRS or any of its officials.
