09-07-2004 WS - Laserfiche WebLink

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Item No: 04 Meeting Date: 09/07/04 Type of Business: WS City of Mounds View Staff Report To: Honorable Mayor and City Council From: Kurt Ulrich, City Administrator Item Title/Subject: Health Retirement Savings Plan Background: On April 12, 2004, the City Council approved a resolution adopting the City’s participation in a retirement health savings (RHS) program as an additional benefit for the employees. The International City Manager’s Association (ICMA) Retirement Corporation was selected as the administrator of the plan. RHS is a City sponsored program that allows employee to accumulate assets on a tax-free basis to pay for medical expenses of the employee, their spouse, and their dependents after the employee retires. Assets are in most cases put into the plan tax-free, accumulate earnings on a tax-deferred basis, and are withdrawn tax free if used for qualified medical benefits. An example would be a long time employee who is retiring and is eligible for a $10,000 cash payout of unused vacation and sick time. This will cost the City $10,765 because of the 7.65% employer’s share of the social security tax. The employee will receive substantially less than $10,000 because they will pay income taxes and the employee’s share of the social security tax. If the same employee were to elect to put the $10,000 into the RHS, it would cost the City $10,000, because the social security tax wouldn’t have to be paid. The employee would get $10,000 into their account because they wouldn’t have to pay social security or income taxes. It would be invested tax deferred and could be paid out tax free if used for qualified medical benefits. Discussion: The April approval by the Council adopted the RHS plan in its broadest form. Although many possible kinds of contributions are allowed, some programs call for additional contributions by the City. It is staff’s proposal to limit employee benefits to employee contributions only. The RHS plan documents specify that the allowable forms of contribution will be defined by the City’s personnel manual and labor contracts. This way, the City can start with a limited set of contributions and add others at the City’s choice without having to amend the RHS plan documents. Examples of other possible contributions: Employee pre-tax contributions: An employee may elect to contribute a percentage of their annual pay to the plan. Once this election is made, it can never be changed. ICMA only recommends this for employees who are near to retirement. The City would save social security tax on these contributions.