Post-Retirement Health Care Savings Plan
March 10, 2003
The merits of a post-retirement health care savings plan (PRHCSP) are
evident. A key concern to present (and certainly future) retirees is the cost of
health care, which now comes from their post-tax dollars. This is often a rude
awakening for faculty entering retirement, as during employment the University
not only covers the major portion of the cost, but most additional costs come
from an employee's pre-tax dollars.
A PRHCSP has the advantages
that each of our present 401a, 403b and 457 plans have; all University and
employee contributions come from pre-tax dollars and earnings on the balance
invested are not subject to income taxes. The contributions can be invested in
one or more funds chosen by the employee from a select group of investment
options. A PRHCSP has another very important advantage; upon retirement or
termination of employment from the University, withdrawals to pay for health
insurance premiums and other appropriate health care costs are not considered to
be taxable income. Thus, the PRHCSP avoids taxation on contributions as they go
in, on accumulated investment earnings, and on tax post-employment distributions
when used for health care
We believe there is no question that the
University should embrace this plan. However, there are questions about the
amounts to go into the savings plan and the source of these funds. The rules of
the program say that each individual in a given "class" must put in the same
amount ($ or % of salary). This "class" cannot be directly defined by age.
However, those nearing retirement would probably want to (and certainly should)
put in more than younger faculty as they have fewer years to put in funds or
have the earnings accrue.
1) For Faculty
Members* the "class" is defined as the number of years employed at the
2) Plan contributions will be collected and invested by
Minnesota Life Insurance Company.
3) Claim payouts will be managed by the
University’s Employee Benefits Department.
4) Plan implementation
will ideally be by July 1, 2003 but no later than January 1, 2004.
All Faculty Members would have a basic contribution each year to the PRHCSP of
one and a half percent (1 1/2%) of salary. This would, for now,
come from the 13% contribution of the University to each individual’s
Faculty Retirement Plan (FRP).
6) All Faculty Members who in fall 2003
have served seven years or more would contribute an additional amount as a
catch-up provision. Additional contributions from those starting their eighth
(8th) or later year in fall 2003 should be in steps of 0.2% per service year up
to those in their 25th year of employment at the University when it would reach
3.6%. This additional 3.6% contribution, over and above the one and a half
percent new contribution from the University, would be the same for all eligible
employees with 24 or more years of service in Fall 2003. For a given individual
these contributions would be frozen at the percentage dependent on their service
at the U up to fall 2003. It should be clear that the contributions to the new
fund would be mandatory; each member of each specific class (years of service
with our definition) must contribute in the same manner. The recommended input
by faculty members with different degrees of service should be reexamined at
least once every three years.
7) The additional money, 0.2% to 3.6% of
salary, would also come from the university’s present 13% contribution to
the basic (401a) plan, reducing the input to that plan by the amount going into
the PRHCSP. This is not a reduction to the individual’s total retirement
funds; rather a transfer to a more tax advantaged plan (PRHCSP). If the
individual wishes to make up for the smaller amount going to the 401a plan,
additional funds could be contributed to either of the Optional Retirement plans
(403b or 457) up to the maximum permitted.
The rationale for these
contributions is to provide a reasonable sum of money at the time of an
individual's retirement. Though people now very close to retirement can never
completely catch up to accumulate enough money to pay for a significant fraction
of their health care premiums, these additional steps will help and would
perhaps be sufficient for those who still have a fair amount of time left before
retirement. The goal is to have the accumulated savings in this plan reach
something in the order of magnitude of an individual’s last year’s
salary within +/-25%, though this is unrealistic for those with less than 10 to
15 years to retirement. Even one year’s salary would probably not provide
(based on an annuity analysis) all of the funds for health care insurance, but
could provide a significant fraction.
8) We also believe that those in
Phased Retirement should be in a separate faculty class. For this class we
propose a significant increase in the individual’s input (essentially
taken from the University’s contribution to the basic Faculty Retirement
Plan) to the PRHCSP, tentatively 10% of salary. This would greatly help those
now approaching retirement through the Phased Retirement Plan. This contribution
would be reviewed periodically when the entire plan is reviewed and may
eventually be phased out.
9) For faculty in either a Phased Retirement or
a Terminal Leave program, there should be a change in how the University pays
the additional health care coverage after leaving the University (two or more
years depending on eligibility for Medicare benefits). At the time a faculty
member ends regular employment at the University, a sum equal to the University
cost of faculty health care (either single or family coverage) for the total
time involved should be placed in the individual’s PRHCSP fund. This would
not represent a change in the present University rule, which provides health
care benefits for retirees during the phased retirement period.
A recurring annual contribution of one and
a half percent (1 1/2%) of salary would be made by all participants in the FRP.
For the present that would come from the 13% University contribution to each
individual’s FRP. An additional contribution by each individual who has
been here for seven years (i.e. in the eighth year of service) would be 0.2% of
salary. For those who have been here longer this would rise by 0.2% for every
year of service until the 25th year of service (after 24 years) when the
individual’s contribution would be 3.6%. This (3.6%) would be the same for
those with still longer service. Thus the maximum input to an individual’s
PRHCSP would be 5.1% of salary. The additional money, 0.2% to 3.6% of salary
would also come from the university’s present 13% contribution to the
basic (401a) plan. Those in phased retirement would make still larger
contributions. Those leaving the University through Phased Retirement or
Terminal Leave would receive whatever funds due for future health care as a lump
sum into their PRHCSP account.
* The actual definition of a
"Faculty Member" in the Faculty Retirement Plan is rather lengthy, but is
essentially: "any employee of the University who holds an appointment of
atleast67% time for a duration of at least nine months and holds one of the
following titles (if an employee holds more than one appointment, the first
title of appointment will govern): a) Faculty (94xx classes); b) Administrative
staff members with personnel classifications 9301-9399; c) Professional staff
members with personnel classifications 9701 through 9799; and d) University of
Minnesota Extension Service (MES) academic staff with personnel classifications
9621 through 9640who are not eligible for a federal appointment. A "T" temporary
appointment does not affect an employee's status in one of the above-described
categories. "Faculty Member," however, shall not include the following: 1)
Faculty members with Visiting, Adjunct, or Clinical prefixes; 2) Staff members
filling administrative or professional positions on an acting basis; 3) Research
Specialists (9755); 4) Clinical Preceptors (9756); and 5) Industrial
There are exclusions from the PRHCSP: "An employee shall
be ineligible for future contributions to the PRHCSP if the MSRS determines that
the employee falls within any one of the following categories: a) The employee
is a foreign national and plans to return to the country in which he or she is a
citizen upon termination of public employment. b) The employee will receive
employer-paid post retirement health care coverage through his/her public
employer, or through a spouse's employer. The insurance must provide
full-coverage for the employee's lifetime. c) The employee will receive post
retirement health care coverage from the
Note, because of the difficult
financial circumstances for the University this year, we have modified our
previous plan which was submitted 13 December 2002. In that plan, we had
proposed one-and-a-half percent of salary would be contributed by the University
to the Post-Retirement Health Care Saving Plan (PRHCSP). Now the expectation is
a zero salary increase, and yet we believe that this program should be initiated
now. Thus, we propose that for the present, the base one-and-a-half percent of
the salary going into PRHCSP for all faculty would come out of the
University’s present contribution to the retirement plan (13% of salary).
Aside from this, the plan would be the same as recommended previously, including
the increased contributions for those who had been at the University seven years
or more and the increased contribution for those in phase-retirement.
There are two very strong caveats that we would like to add. First, we
are going under the assumption that there will be no additional funds for any
University group this year for PRHCSP. If this is not the case, then we would
expect that similar funds would go into PRHCSP for faculty, rather than having
all of the money coming out of the faculty members’ present retirement
Second, we ask that in the future, when the
University again reaches a point that there are reasonable new funds, that the
one-and-a-half percent taken out of the basic faculty retirement plan would be
put back in, returning the University’s FRP contribution to 13% of salary.
The University FRP has been an excellent one. We greatly regret the need to
reduce the basic plan by this change yet we think overall it is a good idea.
However in the future, we are very desirous of seeing the plan return to its
present level of contributions.
This plan was approved by the :
Retirement Subcommittee on Monday, March 10, 2003,
- Faculty Affairs
Committee on Tuesday, March 11, 2003,
- Faculty Consultative Committee on
Thursday, March 14, 2003.
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