Making Sense of Your Retiree Health “Savings” Plan

by | Feb 19, 2020 | Retiree Health

By Jeff Chang

Several municipal clients adopted retiree health savings plans or post-employment health plans, and continue to have questions about what they are and how they should be administered.

Unfortunately, these arrangements are not always fully explained when they are proposed to various cities as powerful tax-saving programs. As a result, a number of municipal clients have confused their plans with “health savings accounts,” or HSAs, and have deposited substantial sums of employee pre-tax payroll deductions into their plans.

A careful review of the vendor-provided documentation for these programs makes several things clear:

  • Although they go by several names, such as: retiree health savings plan or post-employment health plan, these arrangements are all variations of the retiree health reimbursement arrangement, known as RHRA, discussed in an earlier post.
  • Because these arrangements are HRAs, subject to special tax rules, they may only be funded with employer-paid contributions. They may not be funded with employee contributions that are based on what an employee elects. These arrangements are not any form of HSAs.
  • An employer can adopt an RHRA with a leave or PTO conversion feature that allows certain amounts of leave or PTO to be “converted” into an RHRA benefit for the employee. However, such conversions must be made on a mandatory basis by the employer and cannot be made by employee election just prior to termination of employment.
  • Amounts “set aside” in an RHRA can be held by the employer or can be deposited in a separate trust. The use of 501(c)(9) trust, or VEBA, is permitted, but is not required.

If your city, special district or school district adopted one of these arrangements and it contains either employee pre-tax contributions or pre-tax conversions of leave or PTO made at your employee’s election, you should seek advice as to whether the arrangement complies with the applicable tax rules, and what you should do about it.

Jeff Chang is a partner at Best Best & Krieger LLP. He has four decades of experience skillfully evaluating benefit and retirement plan compliance to achieve maximum outcomes for public agency clients throughout California. He can be reached at or (916) 329-3685.

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