Health reimbursement arrangements are getting a lot of attention as a tool for funding post-employment health care, according to Larry Stein, national managing director of AIG VALIC, Houston.
Financial advisors should therefore inquire if a client has such an account and, if so, factor it into the retirement plan, he says.
"There is a tremendous appetite for these plans" in the public sector, Stein says, and AIG VALIC is a lead player in that market. Nationwide, the company has 28,000 client groups for retirement plan services and two million participant accounts.
Public sector employers–schools, hospitals, municipalities, etc.–are facing increasing liability for post-employment benefits in a system that has been pay-as-you-go for many years, Stein points out.
Meanwhile, retirees of those employers are struggling to cope with increasing health care costs, says Bruce R. Abrams, president and chief operating officer of VALIC and VALIC Retirement Services Company, in a statement. In fact, many retirees are being "forced back to work" to meet the expenses, Abrams adds.
In this environment, the HRA is being seen as a vehicle for handling both sets of obligations, says Stein.
Originally known as VEBAs (Voluntary Employees' Beneficiary Associations), HRAs acquired their new look in 2002 when the Internal Revenue Service came out with guidelines on the plans, he notes.
The HRAs are funded by the employer, and the money can be withdrawn, free of federal taxes, for qualified medical expenses not reimbursed by health insurance. Qualified medical expenses can include health insurance premiums, deductibles, long term care premiums and more.
HRAs have no use-it-or-lose-it provision, Stein points out, so the money accumulates from year to year, tax-free. It remains available for qualified medical expenses until death of the retiree, spouse and dependents. That makes it attractive for post-retirement planning, he says.
HRAs also cover qualified medical expenses during the working years, as do flexible spending accounts and health savings accounts, Stein notes. (But the FSAs have a use-it-or-lose-it limitation, and HSAs must be coupled with a high-deductible health care plan, he says.)
