Alternatives to Cash Payout of Accumulated Sick Leave

Presented By:

Ken ZastrowMarket DevelopmentNational Insurance Services

School District of Holmen

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Current Practices• Holmen Policy• Pros and Cons

Alternatives• Definition of HRA and 403(b) • HRA vs. 403(b)

• Pros and Cons

• Examples

Questions

Current Sick Leave Payout

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Current Practices

Accrued Sick Leave• Teachers with at least 15 years of continuous “qualified

service” in the district and at least 55 years of age.

• Accrued sick leave is paid at 0.15% of the retirees contract rate for each day of accrued leave (ex. $45,000 salary X 100 days X 0.15% = $6,750)

• Cash payment is made by January 15th of following calendar year.

Pros • Money can be used for any purpose

Cons • Payout is counted as income

• 7.65% FICA applies for both Employer and Retiree

• Retiree is subject to all taxes (FICA, Federal, and State)

• Retiree has to wait until following January to receive payout

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Alternatives

Better: Employer Sponsored 403(b)• ER and EE Permanently save FICA• Tax-deferred (Federal and State Income Tax paid at time

of distribution)• Funds can be used for any purpose• Interest earnings help increase the value of the benefit

Best: Health Reimbursement Arrangement• Completely Tax Free

• No FICA, No Federal or State Income Tax

• Funds can only be used for eligible medical expenses• Interest earnings help increase the value of the benefit

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Retiree Only HRA vs. Employer Sponsored 403(b) Retiree Only HRA Employer Sponsored 403(b)

Tax-free Federal and State income tax at the time of distribution

Can be used for eligible medical expenses Can be used for anything

No limit on post-employment contribution years; no contribution limits

Contributions can only be made for up to the first five post-employment calendar years; 415(c) limits

Surviving spouse and eligible dependents can continue using the HRA upon the death of the participant

Name beneficiary; funds are never forfeited

Does not allow for additional premium tax credit

Included in household income and could effect premium tax credit calculation

Access must be suspended if rehired and eligible for benefits

Access prior to 59½ must be suspended if rehired and working more than 20%

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Separation Payment

$1,000Cash

FICA Tax($56.50)

Cash

$943.50Cash

Subtract income tax in PRE-retirement tax bracket

$679.32Cash

Separation Payment

$1,000HRA

FICA Tax($0)HRA

$1,000.00 PLUS

INTEREST

HRA

Subtract income taxin POST-retirement tax bracket

$1,000.00HRA

Separation Payment

$1,000TSA

FICA Tax($0)TSA

$1,000.00 PLUS

INTEREST

TSA

Subtract income taxin POST-retirement tax bracket

$750.00TSA

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