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HomeMy WebLinkAbout09-03-2013 c2 establish a health reimbursement act FROM: Monica Irons, Director of Human Resources Prepared By: Pam Ouellette, SLO Retiree Medical Trust Board chair Debbie Malicoat, SLO Retiree Medical Trust Board member Greg Zocher, Human Resources Manager SUBJECT: AGREEMENT WITH ICMA-RC TO PROVIDE SERVICES FOR THE PURPOSE OF TRANSFERRING ASSETS FROM THE DISSOLVED SAN LUIS OBISPO EMPLOYEES RETIREE MEDICAL TRUST TO A HEALTH REIMBURSEMENT ACCOUNT. RECOMMENDATION Adopt a resolution authorizing the establishment of a Health Reimbursement Account (HRA) through ICMA-RC for the sole purpose of transferring assets from the dissolution of the San Luis Obispo Employees Retiree Medical Trust (RMT) and authorize the City Manager to execute any necessary documents. DISCUSSION Background The San Luis Obispo Retiree Medical Trust (RMT) was established in July 2004 by a coalition of employees, which included the San Luis Obispo City Employees Association (SLOCEA) and the San Luis Obispo Management Group (which included all Confidential, Management and some Department Head employees). The purpose of the RMT was to create a private entity into which self-assessed mandatory contributions were made by employees in the above referenced groups. The RMT has 348 participants, representing current and former City employees. The City’s role in the RMT has been extremely limited. The City was neither involved in the establishment or administration of the trust fund. The City has made no contributions to the plan. The trust fund has been managed by a seven member Board of Trustees comprised predominately by SLOCEA members. SLOCEA and the Board of Trustees are solely responsible for IRS approvals and administration of the fund. The City’s sole responsibility up to this point has been to administer payroll deductions and facilitate transfer of the designated amounts to the trust on behalf of participants. The funds arise solely from the individual participants’ payments and no financial contribution at any time has been made by the City. Based on the request of employees, on February 21, 2012, the City Council repealed Resolution No. 9562 (2004 Series) and in doing so terminated San Luis Obispo Management Group’s participation in the RMT. On April 13, 2012 the SLOCEA group also voted to cease contributions to the RMT. With all members of the coalition opting to cease contributions to the trust, the RMT Board of Trustees began the process of determining the best method of terminating the trust and providing access to the trust assets to the participating employees and beneficiaries in accordance with IRS regulations. Meeting Date Item Number C2 - 1 Termination of the RMT Article XIII of the RMT Trust Agreement provides guidance on how the trust may be terminated and provides that “As part of the termination process, the Trustees may arrange for retention of an independent Trustee to administer the wasting trust.” The Internal Revenue Service (IRS) guidelines require the assets be dispersed on the basis of objective and reasonable standards. As the RMT Board performed its due diligence in determining how to dissolve the trust and disperse the assets it became clear that any vehicle to administer the wasting trust needed to be objective and reasonable for all and meet certain criteria: 1. It must be in accordance with all applicable laws and IRS regulations. 2. The distributions should continue to reimburse participants for qualified health expenses. 3. It should be easy to understand and easy for participants to access their money. 4. It should be in the best interest of the majority of the participants and beneficiaries. 5. It should be cost effective and not administratively burdensome. The Board of Trustees has explored several possible termination scenarios, and has determined that the most cost effective and expedient way to dissolve the trust and allow for distributions to those who have contributed to the trust is through a Health Reimbursement Arrangement (HRA). This is the case because this type of plan (an HRA) provides benefits that are very similar in nature to the original concept of the RMT; that is, HRA plans provide for the reimbursement of qualified health expenses for employees that are retired or no longer working for the City. It meets all of the above criteria: is the most cost effective alternative for the trust participants, is in accordance with the IRS, provides reimbursement for medical expenses, is in the best interest of the majority, and is easy for participants to understand and access their money. The HRA will provide individual accounts for each participant, which can be drawn down as the participant requests reimbursement for qualified medical expenses. Depending on the individual’s unique medical circumstances and length of participation in the RMT, which dictates their share of the trust’s assets, it could take years for each participant to fully deplete their account balances, particularly since participants cannot access their accounts while still employed at the City; “in-service” benefits are not permitted under current HRA regulations. Each participant will direct how the assets are invested, similarly to how individuals direct the investment of their 457 deferred compensation plans. The ICMA-RC representative will assist participants with identification of available assets and plan performance. In this respect, the individual account differs significantly from the trust concept – where individuals had no direct control of how assets were invested. Individual asset allocation and performance as well as individual healthcare cost circumstances will determine the length of time that trust participants will continue to receive benefits; it will not be a lifetime benefit as envisioned under the trust. City involvement The IRS requires HRA plans to be “employer sponsored” plans, therefore the RMT Board of Trustees approached Human Resources staff to discuss the possibility of having the City act as the plan sponsor for the purposes of distributing the RMT’s remaining assets. Dissolution of a medical trust is a complex and challenging topic and Human Resources staff has worked diligently with the C2 - 2 RMT board to determine the best course of action and the implications for the City. After consultation with the City’s outside counsel for insurance and benefits, staff is supportive of the RMT’s request for the City to act as the conduit for this transaction. The City would assume a relatively minor risk regarding the allocation methodology of transitioning from a pooled account to individual participant accounts. The RMT Board of Trustees provided written communication to all the participants explaining the methodology of asset transfer from a pooled account to individual accounts, as performed by the RMT’s third party administrator. The RMT Board of Trustees also conducted an informational meeting on August 7, 2013 to educate plan participants. The meeting was well attended and no concerns have been raised. Given that the trust has experienced overall losses due to administration costs outpacing investment gains, the likelihood of a claim regarding the distribution of assets is very small. Further, the total assets are estimated to be $1.6 Million if one the 348 participants had a claim regarding the allocation, it would be relatively small. To transition from the dissolved trust to an HRA requires Council to formally approve the establishment of the HRA plan and it will require some oversight and administration involving Human Resource staff time; however after evaluating the plan and requirements, it is not anticipated that this will be burdensome to Human Resources staff that already has a good working relationship with ICMA-RC. The plan will be structured so that it only exists for the purpose of distributing each individual’s share of RMT assets. Additional contributions will not be permitted. All costs will be borne by the HRA plan participants through monthly fees paid by each participant, there will be no costs to the City. The RMT has agreed to make available three members to serve on an ad-hoc committee which review investment funds available to participants. This committee would make recommendations for potential changes to investment funds that ICMA-RC makes available during the City’s annual plan review. Next steps The trust’s current third party administrator is calculating each participant’s share of the RMT assets based on the length of time they participated in the trust. After each participant’s allocated share is determined and final expenses have been paid, the RMT will assist the vendor (ICMA-RC) in processing the appropriate enrollment paperwork for each person. The RMT’s third party administrator will transfer cash to ICMA-RC to fund the individual HRA accounts. CONCURRENCES The RMT Board of Trustees unanimously concurs with the City sponsoring the HRA with ICMA- RC for the purpose of transferring assets from the dissolved RMT. FISCAL IMPACT There is no direct fiscal impact to the City related to this transaction. C2 - 3 ALTERNATIVES Do not adopt the resolution to establish the HRA for the purpose of distributing SLORMT assets to current and former employees. This is not recommended because establishment of an HRA is the most cost effective and expeditious manner in which to distribute the assets of the dissolved trust. It is in the best interest of the current and former employees and has minimal impact on the City. ATTACHMENT Resolution authorizing an HRA with ICMA-RC t:\council agenda reports\2013\2013-09-03\establish a health reimbursement account with icma-rc (irons)\car-establish a health reimbursement account with icma-rc.docx C2 - 4 RESOLUTION NO. (2013 Series) A RESOLUTION OF THE COUNCIL OF THE CITY OF SAN LUIS OBISPO AUTHORIZING THE ESTABLISHMENT OF A HEALTH REIMBURSEMENT ACCOUNT (HRA) WITH ICMA-RC WHEREAS, the San Luis Obispo City Employees Association (SLOCEA) and the San Luis Obispo Management Group established the San Luis Obispo Retiree Medical Trust (RMT) in July 2004; and WHEREAS, on February 21, 2012 City Council repealed Resolution No 9562 (2004 Series) and in doing so terminated San Luis Obispo Management Group’s participation in the RMT; and WHEREAS, on April 13, 2012 the SLOCEA also voted to cease contributions to the RMT; and WHEREAS, the termination of contributions to the RMT caused the RMT Board of Trustees to explore options to terminate the trust and distribute the trust’s assets to the participating employees and beneficiaries in accordance with the Internal Revenue Service (IRS) guidelines; and WHEREAS, the most cost effective and expedient way to dissolve the trust and transfer the assets is to establish a HRA; and WHEREAS, the IRS requires HRA plans to be employee sponsored; and WHEREAS, after a thorough review of HRA plans available, the Trustees recommend ICMA-RC; and NOW, THEREFORE, BE IT RESOLVED, that the Council of the City of San Luis Obispo hereby authorizes the establishment of a HRA through ICMA-RC for the sole purpose of distributing assets from the dissolution of the RMT and authorizes the City Manager to execute any necessary documents. Upon motion of ______________________________________________, seconded by _____________________________________, and on the following vote: AYES: NOES: ABSENT: The foregoing resolution was adopted this 3rd day of September, 2013. C2 - 5 ___________________________________ Mayor Jan Marx ATTEST: __________________________________ Sheryll Schroeder Interim City Clerk APPROVED AS TO FORM: __________________ J. Christine Dietrick City Attorney C2 - 6