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Leverage a Tax-Free Special Payment Plan

By May 19, 2022Employers, ICHRA
Why contribute payments into a funded HRA account? Well not just any HRA account, the YourWay HRA plan is the tax-free solution for retirees looking to avoid exhausting their retirement fund to pay for medical expenses. This plan is especially beneficial when compared to more traditional Special Payment Plans. And there’s no better benefit partner than OneBridge Benefits—the largest funded HRA administrator in the country.

Did you know that the YourWay HRA powered by OneBridge can offer a better funding alternative for Special Payment Plans?

What do we mean by Special Payment Plans?

Well, it starts with the tax problem that results when public-sector retirees are paid large, lump sum separation cashouts of unused sick leave, vacation, or PTO, or severance pay. 

To avoid this tax problem, these separation payments are often contributed into tax deferred retirement programs, such as a 401(a), 403(b), or 457 plan through what is referred to as a Special Pay Plan. This defers the income taxes on the separation pay. Retirees only pay taxes when they later withdraw funds from these deferred retirement accounts.

That sounds like a great way to defer a tax bill on funds that you don’t intend to use immediately, right? So what is the problem?

The problem is that retirees, who will inevitably incur medical expenses in retirement, will be using after tax income for an expense that could instead be paid on a tax-free basis if structured properly. This is because withdrawals from a qualified 401(a), 403b, or 457 plan, even for medical expenses, are subject to federal income tax and applicable state and local income taxes at the retiree’s ordinary income rate.

This is where the YourWay HRA comes in.

The YourWay HRA is a tax-beneficial alternative for public sector retirees who will inevitably spend some of their retirement income on medical care expenses. 

By contributing some of all of these separation payments into a funded YourWay HRA plan, the employer and the employees benefit.

First, non-elective or mandatory employer contributions of leave cash outs made to the YourWay HRA are exempt from federal income tax and FICA.

Second, funds contributed to the YourWay HRA can be invested and grow on a tax-exempt basis.

But most importantly, withdrawals from the funded HRA to reimburse qualified medical expenses for the retiree, their spouse, or their dependents, are exempt from federal income taxes.

Retirees have a tax-free investment account they can use to cover the costly—expense medical care expenses—they’ll inevitably experience during retirement.

Let’s see how much money a retiree could actually save if some or all of a leave cashout is funded into a YourWay HRA instead of a 403(b) retirement account.

Two retired teachers—Jane and John. John directed his separation pay into his 403(b). Jane directed her separation pay into the YourWay HRA. Both John and Jane spend $450 a month on Medicare and other out-of-pocket health expenses, equalling $27,000 over five years. 

Assuming an average tax bracket of 22% for both John and Jane, John would need to withdraw almost $33,000 of taxable income from his 403(b) to cover the $27,000 dollars in medical expenses. 

But not Jane. Since her cashout was contributed into a funded YourWay HRA account, she withdraws only the amount she needs to pay her medical expenses, on a tax-exempt basis. Jane doesn’t lose any of her retirement savings paying taxes on those amounts.

Jane’s funded YourWay HRA saved her almost $6,000 in taxes over five years.

Why should retirees have to exhaust their retirement fund down the road to pay taxes on medical expenses they can pay tax free? Well, with a YourWay HRA powered by OneBridge Benefits, they don’t have to.

If the tax savings isn’t reason enough to choose YourWay HRA, how about the added comfort of knowing that you are choosing the largest funded HRA administrator in the country, with industry-leading technology, including a single sign-on portal and mobile app, plus white-glove account management, friendly personalized customer care, full-service compliance, and more.

Start saving more for your retirement future with the modern, seamless, and triple tax-advantaged Special Pay Plan alternative—YourWay HRA.