January 19, 2005
Contributions to HSA Not Excludable From Income Tax Under State Law
State and Federal Law Changes in 2004: Impact on Public Sector Programs
In addition to the many changes generally impacting all employers (e.g., change in definition of dependent, health savings accounts (HSAs), COBRA regulatory changes), several changes to and developments in the law in 2004 are particularly important for Minnesota public sector employers.
Retiree Coverage: Availability & Who Pays
Case Summary. This past year, the Minnesota Court of Appeals resolved a long-standing issue regarding a governmental entity’s payment for bargained retiree coverage. In Norman v. Housing and Redevelopment Authority of Chisholm, the Court of Appeals generally ruled that governmental entities may contract to pay for such coverage beyond the duration of the collective bargaining agreement in effect at the time of retirement.
Retiree health coverage is governed by two Minnesota statutes. Section 179A.20, subd. 2a prohibits governmental entities from obligating themselves to pay retiree health benefits beyond the duration of the collective bargaining agreement in effect at the time of retirement. Section 471.61, subd. 2b (a/k/a Chapter 488) addresses the availability of continuation coverage for retirees and how the cost of such coverage may be determined. In contrast to Section 179A.20, Section 471.61 recognizes a governmental entity’s ability to contract to pay for the retiree continuation coverage.
In the Norman case, the applicable collective bargaining agreement at the time of the employee’s retirement provided that the City’s health reimbursement arrangement (HRA) would pay retiree’s health insurance premiums indefinitely. Subsequently, the collective bargaining agreement expired and the HRA ceased paying the retiree’s premiums, relying upon Section 179A.20, subd. 2a. The Court of Appeals determined that Section 471.61, subd. 2b prevailed over Section 179A.20, subd. 2a and that the City could and did contract to fund the retiree’s health coverage indefinitely.
Other Impacts. The fact, clarified by Norman, that a governmental entity may agree to fund a retiree’s health coverage indefinitely has an impact on the governmental entity’s GASB OPEB liability. To the extent the governmental entity does not fund its obligation to pay such benefits with a trust, but instead pays for such benefits as they become due, GASB OPEB Statements 43 and 45 will require the unfunded future liability to be disclosed in the governmental entity’s financial statements.
Suggestions. As a result of this case, we recommend governmental employers review the language of their collective bargaining agreements to identify problems similar to the one in the Norman case. To the extent such agreements provide indefinite funding of retiree health benefits, under Norman, the employer will be required to provide that funding despite the expiration of the collective bargaining agreement. If the employer does not wish to undertake such an obligation, collective bargaining agreements should be drafted carefully to indicate the length of the employer’s commitment to provide such funding.
Retiree-Only HRAs
Note: PLRs may be relied upon only by the taxpayer requesting the ruling. Nevertheless, this PLR confirms the position of the IRS on retiree-only HRAs.
During the last week of 2004, the IRS released a private letter ruling (PLR) approving a retiree-only HRA. The plan approved by the PLR was a plan established for the purpose of reimbursing only medical expenses that were incurred after retirement or other termination of employment. No benefits were payable during the employee’s employment with the employer. Although the IRS had previously indicated indirectly that retiree-only HRAs were allowed (in guidance on health savings accounts), this is the first IRS guidance specifically approving such a plan.
The ruling is also noteworthy because the IRS made a point of commenting about the issue of death benefits. The IRS stated: “Moreover, we are specifically not ruling on whether contributions, coverage, and payments or reimbursements will be excludable from gross income under §§106 and 105 if any amounts may be provided under the Plan to anyone other than [employees] and the spouses and dependents of [employees] or the surviving spouses and dependents of [employees].” This statement by the IRS is unusual because the plan did not provide amounts to anyone other than employees and their spouses and dependents. Therefore, the comment on death benefits was unnecessary. We read the inclusion of this statement to be an acknowledgement by the IRS that the issue of death benefits is a concern of employers about which guidance is needed. However, until such guidance is issued, there is no authority for allowing access to an HRA account by a designated beneficiary other than the employee’s spouse and dependents.