RCM Robinson Capital Management LLC
Retiree Medical Savings Accounts (RMSAs)


Retiree medical savings accounts are employer-funded accounts that accumulate and compound tax-free during employment and are used to pay for retiree health insurance premiums and uninsured expenses during the employee's retirement years. Eligible health premiums include Medicare Part B, Medicare Part D, Medicare supplement insurance, long-term care insurance, employer sponsored retiree medical, dental and vision coverages as well as out-of-pocket expenses such as non-insured medical expenses, prescription drugs, deductibles, co-payments, and co-insurance. Reimbursements for these premiums and expenses are not taxable income to the retiree.

The accounts are typically funded on a regular basis by the employer as a fringe benefit, or through unused and accrued vacation and sick pay, or severance pay deposits. Account balances are invested and receive tax-free earnings. Accounts are commonly invested and managed by the employee much like an employer sponsored retirement plan. Their value may be based on employer contributions during employment plus earnings, like 457, 403(b), 401(a), and 401(k) plans, or on a lump sum contribution at retirement, like pension equity plans.

Employees do not contribute to retiree medical savings accounts, although some employers also allow employees to pre-fund separate supplemental accounts for retiree health costs. The employer's contributions to retiree medical savings accounts are usually based on service and possibly other factors, such as age or employment status.

Why consider offering Retiree Medical Savings Accounts?

With the introduction of GASB Statement 45, many governmental employers may be forced to reduce or eliminate retiree medical benefits as many private sector employers did following FASB 106. It is conceivable that fewer employers will offer retiree medical insurance programs at a time when more employees are most interested—thus increasing the RMSAs effectiveness as a recruiting and retention tool.

The financial constraints imposed by the GASB 45 standards have governmental employers concerned with predicting and managing retiree health care program costs. Employers that have decided to use retiree medical savings accounts to support their workforce goals are changing to a defined contribution approach as a more attractive approach to providing retiree medical benefits than an open-ended defined benefit approach.

This defined contribution approach makes retiree medical savings accounts more stable and predictable for each employee. Neither the retiree's retirement date nor the timing of the reimbursements substantially affect the employer's GASB 45 liability. Retiree medical savings accounts offer a competitive workforce advantage without exposing the employer to unpredictable and volatile future expenses.

Is there a consumer's need for RMSAs?

One of the greatest threats to retirement security is retiree health care premiums and expenses. According to Fidelity Investments, it is estimated that a couple retiring today at age 65, without access to an employer sponsored plan, will need about $260,000 in savings to cover lifetime post-retirement medical expenses. This amount is needed to cover Medicare Part B premium,  Medicare Part D premium, expenses associated with Medicare cost-sharing provisions, and the cost of services not covered by Medicare. For those choosing to retire early, the post-retirement medical obligation will be noticeably larger. Click to view full Fidelity press release.

Assuming a post-retirement tax rate of 25%, the tax savings alone generated from tax-free reimbursement of health care expenses through a fully-funded health care savings plan would be $50,000, as compared to a taxable withdrawal for payment of these same expenses from an IRA or employer sponsored retirement plan (e.g., 401(k), 403(b), 401(a), 457).

What about Government subsidies in the future?

According the U.S. Government Accountability Office (GAO), by 2020, the number of individuals in the 55 to 65 age group is projected to increase by 75% and, by 2030, those over age 65 are expected to double, creating the largest percentage of the U.S. population in retirement in America’s history1.

The Office of the Actuary in the Centers for Medicare & Medicaid Services (CMS) reports that Medicare is fiscally unsustainable as currently constructed. The Hospital Insurance Trust Fund, which provides funding for Medicare Part A, is expected to experience a growing annual cash deficit in 2018, just one year after Social Security outlays are expected to exceed tax revenues in 20172.

The prospect of additional Government subsidization in the years ahead seems unlikely given the current financial state of Medicare and Social Security.

What can be done?

With Medicare available at age 65, there is some comfort in knowing that a subsidized, or pre-funded, form of insurance coverage exists. However, there are large financial “gaps” in Medicare coverage. These gaps include significant cost-sharing provisions (deductibles and coinsurance). Another gap is Medicare Parts B and D premiums, which are the responsibility of the participant. Currently, this collective financial gap accounts for 45% of total health care costs, or approximately $12,885 per year per couple, according to the GAO.

Given the present outlook, pre-retirees may want to begin planning for the health care expenses of their retirement years. Accruing a tax-free Retiree Medical Savings Account through America's VEBA Solution is one element of successful retirement planning that should not be overlooked.

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RCM Robinson Capital Management LLC, Securities America, Inc, 27 Reed Boulevard, Mill Valley, CA 94941

(phone) 415-771-9421       (fax) 415-762-1980