DATE: November 10, 2016
TO: Board of Mayor and Aldermen
FROM: Eric Stuckey, City Administrator
Shirley Harmon Gower, HR Director
Russ Truell, Assistant City Administrator
SUBJECT:
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*Consideration of Resolution 2016-78, A Resolution to Adopt a Retirement Health Savings Plan for Employees and Approve Adoption Agreement with ICMA-RC. (11/22/16 WS)
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Purpose
The purpose of this memorandum is to provide information to the Franklin Board of Mayor and Aldermen (BOMA) concerning the creation of a Retirement Health Savings Plan for City Employees to use upon their retirement.
Background
The Internal Revenue Service allows deferred compensation plans to be funded by employees or employers on an income tax exempt basis. One particular plan category, titled Retirement Health Savings (RHS) plan, is also exempt from income tax when disbursements are made for medical expenses and related health insurance payments and premiums.
It is advantageous to employees to use this savings vehicle to prepare for retirement. One method of funding the plan is designating excess leave balances in the year of retirement. By requiring some portion of leave balances to be contributed to a Health Savings Plan, employees can enjoy reduced income tax liability in the year of their retirement and when expenditures are made after retirement.
The City implemented an RHS plan in 2006 that was entirely voluntary. But before our employees could learn about the plan, the Internal Revenue Service changed the rules and required any contributions to such a plan to be mandatory.
As health care costs continue to rise faster than overall inflation, it is important to try to help our employees prepare for their health and medical expenses after retirement. The City provides no coverage for retired employees over the age of 65, and provides limited assistance on insurance premiums to employees that retire at an earlier age. Often we hear from early retirees that the cost of their health insurance is challenging.
Without adding any new financial responsibility to the City, an RHS plan can be implemented for retiring employees. By requiring that a portion of accumulated vacation and sick leave be contributed to a Retirement Health Savings account, employees can receive the value of their leave balances in two parts: a lump sum cash payment, as they now receive, and a contribution to an individual RHS account.
As an initial phase of an RHS plan would is proposed to be implemented for the City Administrator, Assistant City Administrators, and Department Directors. Under this program, the first $24,000 of accrued leave payout would go to the employee as wages. This amount is also the maximum contribution that can be made into a 457 retirement/deferred compensation plan. This groups has thoroughly reviewed and discussed the RHS plan and responded to a survey strongly in favor of participating in the program. Moving forward, the RHS program will be discussed with other City team members to determine if they too would like to be included in the plan.
Financial Impact
There is no direct financial impact to the City, as leave balances are due and payable at retirement according to current Human Resource policies. Employees would receive full value for their accrued leave, with a portion flowing to the Health Savings Plan. There is a small benefit to the City Pension Plan as funds contributed to the RHS plan are not considered wages in final pension benefit calculations.
Recommendation.rec
Staff recommends approval of the Resolution and adoption of the Plan.