As the baby boomer generation continues to retire, the financial strain on the retirement system is becoming increasingly evident. The Transamerica Center for Retirement Studies reports that the median savings for baby boomers are approximately $200,000, which, using the 4% rule, translates to an annual income of around $8,000. Combined with the average Social Security check of just over $19,900, this results in a yearly income of just over $27,900. While this may seem like enough to live on, medical expenses can quickly accumulate, especially as individuals age. A report from RBC Wealth Management suggests that a retired couple may incur medical fees totaling more than $660,000 throughout their post-retirement lifetime. According to the Pew Research Center, the retirement population has grown significantly in the last two years, increasing by 3.5 million retirees. This added burden on the system, which is already experiencing shortages of facilities and staff, is causing concern. While 80% of retirees claim to have sufficient funds to live comfortably in retirement, the 2022 HSA Bank Health & Wealth Index shows that one-third of those surveyed were uncertain about their ability to cover health care expenses in the near term or during retirement. To provide financial relief and gain greater control over the volatile and often unpredictable cost of medical benefits for retirees, more and more employers are turning to retiree reimbursement arrangements (RRA) rather than traditionally defined benefit group plans. RRA offers a more attractive benefit for employers seeking to maintain control over expenses amid inflation and market uncertainty. Retiree reimbursement arrangements (RRAs) are a type of employer-funded account created to help reimburse retired employees for out-of-pocket medical costs, including health insurance premiums and Medicare premiums. Employers can choose to offer a fixed or variable dollar amount and decide which expenses they wish to reimburse, providing the necessary flexibility to design arrangements that meet the needs of their retirees while also managing costs. Typically, an employer contributes a set amount to an RRA fund, which is then used to reimburse retirees for expenses such as Medicare Advantage or Medicare Supplement plans, as well as eligible health care costs for the retiree and, in some cases, the retiree’s family. The retiree is responsible for covering any remaining expenses. Contributions made by the employer to RRAs that follow Internal Revenue Service (IRS) rules are 100% tax-deductible for the employer and tax-free for the retiree. However, the retiree is not permitted to contribute to the fund, as the employer solely funds it. The employer determines the annual amount to be reimbursed until the funds in the RRA are exhausted. When a retiree incurs an expense, it is submitted to the fund administrator for reimbursement. If the retiree does not use the full amount in any given year, the balance can be rolled over to the following year. Employers may seek the assistance of consultants or actuaries specializing in health reimbursement arrangements to help determine their contribution level and find the best options for their unique situation. RRAs can be established before an employee retires, but employees can only access the funds once they have retired. Employers considering transitioning from their current health care plans to RRAs should be mindful of how employees may react to a change in benefits and develop a strategic communication plan before implementing the transition. RRAs can serve as a cost-effective way to reward long-term employees upon retirement. They can also act as a tool for attracting and retaining top talent. Overall, RRAs may be a suitable solution for employers seeking to alleviate the financial burden of healthcare costs in retirement.
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Email: [email protected]
Phone: 4022508277
Bio:
Carl Wyllie is an advisor focused in areas of Medicare, retirement, estate planning, and crisis planning. Carl works with individuals of all ages in planning for their retirement. He is uniquely effective in building working relationships between their families and elder care law attorneys to assist them in avoiding a healthcare crisis. Carl is particularly sensitive to helping provide the means for his clients to maintain their independence and dignity when a change in their health occurs due to the natural aging process.
