Help your employees think about retirement now with a RRA

Today, another 10,000 baby boomers will announce their retirement. They will have saved around $200,000 for their retirement, the median for their generation, according to the Transamerica Center for Retirement Studies. Using the 4% rule, their savings will yield an annual income of about $8,000. Their Social Security checks will add an average just over $19,900 for a total annual income of just over $27,900.

That is not much to live on. Medical expenses, which are likely to increase with age, could cost a retired couple more than $660,000 over their post-retirement lifetimes, according to a report from RBC Wealth Management.

Over the last two years, the retirement population, which had been increasing at a rate of 1 million annually, has grown by 3.5 million retirees, according to the Pew Research Center, adding even more stress to an increasingly expensive system already experiencing severe shortages of facilities and staff.

And while Gallup reports that 80% of retirees say they have enough money to live comfortably in retirement, the 2022 HSA Bank Health & Wealth Index℠ shows that one-third of those surveyed were uncertain that they would be able to cover health care expenses in the near term or in their retirement.

Employers can help ease some of that financial stress, while at the same time gaining more control over the often volatile and unpredictable cost of providing medical benefits to retirees. With inflation and market uncertainty, employers want better control over expenses while also offering an attractive benefit.

As a result, more and more are turning to retiree reimbursement arrangements (RRA), rather than traditional defined benefit group plans, to provide medical benefits for retirees.

RRAs are employer-funded accounts created to help reimburse retired employees for out-of-pocket medical costs, including health insurance and Medicare premiums.

An employer can offer a fixed or variable dollar amount of money and can determine what expenses they want to reimburse. That in turn provides the flexibility employers need to design reimbursement arrangements to best fit the needs of their retirees while holding costs steady.

Typically, an employer contributes a set amount to an RRA fund, which then reimburses retirees for Medicare Advantage or Medicare Supplement plans along with eligible health care costs for the retiree and in some cases the retiree’s family. The retiree covers the difference. (The full list of approved tax-deductible expenses can be found in the Internal Revenue Service Code, Section 213D.)

Employer contributions to RRAs that follow IRS rules are 100% tax deductible to the employer and tax-free to the retiree. The employer funds the account. The retired employee cannot contribute to it.

The employer determines the annual amount it will reimburse until the fund is exhausted. Once the retiree incurs an expense, it is submitted to the fund administrator for reimbursement.  If the retiree does not use the full amount in any given year, the employer can roll the balance over to the next year.

Consultants and actuaries specializing in health reimbursement arrangements can help employers determine their contribution level and find the best options for their unique situation. The fund can be established before the employee retires, but employees can access the fund only after they retire.

However, employers who want to move from their current health care plans to RRAs need to be aware of how employees are likely to react to a change in benefits. Employers should be strategic in developing a communications plan before transitioning to an RRA. They should over-communicate during every step through the process.

Related: How prepared are your employees for health care expenses in retirement?

RRAs offer a predictable and cost-effective option to reward longtime employees as they retire and can act as a talent attraction and retention option for employees still years away from retirement. In all, an RRA might be a solution for employers looking to help ease the financial stress of health care costs in retirement.

Kevin Robertson, CRO, HSA Bank