RETIREMENT PLANNING/Caring for retiree health

Glendale, Calif., switched its retiree health care benefit plan from one that was managed by the city to one in which employees can manage their investments. The change has simplified plan administration and expanded retirees’ health care options.

Glendale is a medium-sized city in Southern California with 2,000 employees. Health care for retired employees has long been an important, but largely unappreciated, part of the employee benefits package. In the 1970s, the city began offering a retiree health care plan, the value of which was determined by the number of unused sick days each employee accumulated while employed. When employees retired, they used the unused sick days to purchase medical premiums up to a certain amount. As medical expenses soared, the city’s liability for retiree health care grew to approximately $5 million annually. Moreover, the city did not have a way to limit its liability because it could not anticipate future costs.

The plan was difficult to administer because members of different employee unions received different benefits, and the plan’s long list of restrictions and requirements could confuse even the most-educated employees. Additionally, the plan was quite restrictive. After they retired, employees needed to stay within the same health plan they used while they were employed. If retirees decided to switch to their spouse’s health plan, they were not compensated for their unused sick time.

In 2001, a group of the city’s managers met to examine alternative plans that were easier for employees to understand, provided more flexibility and would limit the city’s liability. The group examined several alternative benefit formats, including medical savings plans, voluntary employee benefit associations (VEBA) and 401(h) plans. In the end, the city offered its union and unrepresented employees the VantageCare Retirement Health Savings (RHS) Plan from Washington, D.C.-based ICMA Retirement Corp.

Ultimately, all city employee groups adopted the plan. Now, when employees retire, they receive their final accumulated sick leave pay and vacation pay in RHS accounts. Employees who are eligible for overtime pay can contribute to the RHS before they retire. (The city has limits on compensation time, which employees can use to take days off in lieu of receiving overtime pay. If employees exceed those limits, payment for the time automatically is deposited in the RHS untaxed.) Employees manage their own investments in the RHS.

The city now has a benefit program that is easy to administer and to explain to employees. Employees have incentives to not use their sick days and to save for retirement health care while they are working.

When employees retire, they have a substantial amount of money that can be used exactly as they choose. Employees can move to a spouse’s plan, and the RHS money can be used to pay for medical expenses, such as co-pays and deductibles. They can buy their own insurance if they choose, or they can continue to use the city’s medical insurance plan.

The liability is capped at 1.2 percent of payroll, so the city is protected from rising health care costs. Employees take their accumulated benefits away at retirement, and the city has eliminated a source of uncertainty.

This year, the city changed managers’ benefits to allow them to deposit vacation compensation annually into the RHS. They must decide before Jan. 1, 2005, whether they want to allocate some of their vacation pay to the plan. The city plans to extend the same benefit to fire employees this fall.