HomeMy WebLinkAbout15.E.5. Presentation on Post Employment Health Plan-Res. No. 6160
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CITY OF SHAKOPEE
Memorandum
TO: Mayor and City Council
FROM: Mark McNeill, City Administrator
SUBJECT: Post Employment Health Plan Adoption
DATE: December 3, 2004
INTRODUCTION:
The Council is asked to review information relating to an option for employees to fund a
plan for post employment health insurance expenses, and give feedback for later
consideration.
BACKGROUND:
For the past several months, an employee advisory group has researched options meant to
find incentives for early retirement of employees. The background and information is
contained in the November 24th memo from the Payroll/Benefits Coordinator.
Three local vendors made presentations to the employee advisory committee. After
consideration, the committee's recommendation was to go with a post retirement health
care saving plan (HCSP) administered by the Minnesota State Retirement System
(MSCR), authorized by Minn. Stat.. 352.98 (2001 Supp.) This plan meets IRS
definitions, had the lowest administrative fees and a wide choice of investment choices
offered by the State Board Investment (SBI). Highlights of this plan are:
. Employee can build a tax-free savings account
1. Tax free going in
2. Tax free going out
. Account $ can be used to offset employee and/or dependent medical expenses
after termination of employment.
. Eligible funding sources
1. Employer paid contributions
2. Mandated employee contributions
. Severance Pay (unused sick and/or vacation
. Designated percentage of pay
. Ineligible Funding Source
1. Voluntary employee contributions.
. Must be bargained for represented employees
. Must be included in personnel policy for non-represented employees
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. Cannot be individual choice; everyone in bargaining or covered under personnel
policy must participate as set out in agreement.
Initially this plan is being designed for the "non-contract" benefit-eligible employees
covered by the Personnel Policy. This includes full-time employees and part-time
employees who average 30 hours per week or more. The represented (contract)
employee groups shall remain on the Nationwide PEHP plan until a new plan would be
successfully bargained.
For the putpose of grouping the levels of participation, the noI1-contract employees are
divided into four groups, based upon years of service as shown in the attached proposal.
, HCSP
POST RETIREMENT HEALTH CARE SAVINGS PLAN
NON-UNION EMPLOYEE CONTRIBUTION PROPOSAL
Years of Service with Hire - Beginning 2nd Beginning 16th Beginning of
City of Shakopee year 1 year - 15 years year-30 years 31st year +
% of per payroll contribution 0% 1% 2% 2%
City Contribution $25/mo $25/mo $25/mo $25/mo
Severance contribution None 50%* 100% 100%
Of eligible sick
Contribution of None None 50% 100%
Accrued Vacation
Accelerated Sick Leave N/A N/A 100% of 100% of
Severance Payout Step-up Step-up
Formula Formula
*Upon eligibility after year 5
Accelerated Sick Leave Severance Payout
The City of Shakopee appreciates employees, who through long-term service and dedication,
contribute to making the city a successful and positive service provider. In recognition thereof,
the City acknowledges such long-term service by providing an accelerated sick leave payout
formula listed below if the employee meets all the following conditions:
. Full-time employee with the City of Shakopee for 15 continuous years or more.
. Employee must reach the age and service requirements to be qualified for retirement
under PERA.
. Employee is resigning/terminating in good standing and the termination is voluntary.
. The amount of the severance pay-out shall be based on the employees final sick leave
accrual balance at the time of separation.
. The accelerated severance payment will be deposited in the employee's HCSP account
two weeks after the employee's final paycheck.
Completion of Continuous Service
With the City of Shakopee Step-up Payout formula
15 years 55%
16 years 57%
17 years 59%
18 years 61%
19 years 63%
20. years 65%
21 years 67%
22 years 69%
23 years 71%
24 years 73%
25 years 75%
*Anniversary date of full-time employment or part-time benefit eligible date is used to compute
years of service with Shakopee.
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Mandated Emplovee Contribution:
The City recently surveyed the City's 51 non-contract employees, and 39 responses were
received. Of the responses, 35 indicated interest in participating in a post retirement
health care savings plan. A majority of employees indicated a willingness to contribute a
portion of their current income into such an account. The amount of compensation
contributed ranged from zero percent to a high of 15%. However, the largest number of
respondents indicated a willingness to contribute 1 % or 2%. Not surprisingly, those
nearest to retirement were generally more interested in contributing a higher amount.
New employees with a year or less service and who have not completed the required one-
year probationary period will not be required to contribute.
Emvlover Paid Contribution:
The City currently contributes $25.00 per month per employee into the employee's
Nationwide PEHP account. The recommendation is not to chaiige that amount for 2005.
Effective January 1, 2005,110n-contract employees will no longer participate in the
Nationwide Plan, instead the $25.00 per month per employee will be re-directed to the
State's HCSP if approved by Council. As indicated earlier in this memo, the union
contract employees will continue to participate in the Nationwide Plan with $25.00 per
month per employee.
Severance Pav Contribution:
Another allowable method of accumulating money in an employee's individual account
would be to place all or a portion of severance pay into the account. Severance pay is
unused sick leave compensated upon the employee's separation of employment with the
City. It is compensated at 45% ofthe accumulated sick leave balance for employees who
. have been employed with the City for five years or longer. For employees who have
completed five full years of service (beginning of the 6th year) through the completion of
15 years of service with the City of Shakopee, 50% of eligible severance pay would be
placed into the employee's account. Employees with more than 15 years of service with
the City would have 100% of severance placed into their account.
Vacation Pav Contribution:
Based on employee survey results, we are recommending that only those employees who
have more than 15 years of service with the City of Shakopee contribute any unused
accrued vacation pay in their account at the time of separation. For the third group (16-
30 year employees) we are recommending 50%; for the longest tenured employees (more
than 30 years), it should be the full 100% of available unused vacation.
Accelerated Sick Leave Severance Pav-out for Long-Term Emplovees:
One ofthe differences between non-contract and contract employees has been a Long-
Term Employee Lump Sum Payment that has been in place since the mid-1990's for
police and public works employees (reference again the November 24th memo for
background information).
In the interest oftreating all non-contract employees fairly, I suggest that consideration of
a similar plan be made. However, perhaps a better alternative to the contract employees'
lump sum would be to provide an accelerated pay-out of unused accumulated sick leave
similar to a provision currently in place for employees participating in a health saving
plan at the City of Prior Lake. In Prior Lake, long-term employees may receive up to
100% of their unused accumulated sick leave contributed to their health savings by the
City - this is as compared to the 45% that is currently paid by the City of Shakopee at the
time of separation.
The incentive for an accelerated severance pay-out of the sick leave would provide a
motivation for employees not to inappropriately take sick leave, but more importantly,
assist employees in their retirement planning and provide an incentive for early
retirement. Placing these funds in the health savings plan is a significant advantage to the
separating employee as separation pay is taxed at higher supplemental rates up to 41 %.
The Accelerated Severance Pay-out option as recommended provides a "ramped up" buy
back of sick Jeave, increasing 2% each year from the 55% (vs. the normal 45%) at 15
years of completed service with the City of Shakopee, to a maximum of 75% after 25
years or more of service with the City of Shakopee.
BUDGET IMPACT:
The budget impact of implementing an HSP program is as follows:
1. Rescind the ICMA plan, and instead implement the State of Minnesota HCSP
Plan - no impact to City.
2. Redirect the $25.00 per month into the State Plan - no new City impact.
3. Mandated Employee payroll contribution - Savings to the City- the City saves
7.65% FICA (tax-free)
4. Vacation pay contribution - Savings to the City- the City saves 7.65% FICA
(tax-free)
5. Implement an Accelerated Sick Leave Severance Pay-Out for long term
employees-- There are 7 non-contract employees who would meet the
qualifications for the Accelerated Sick Leave Severance Pay-Out. If all of
those employees left before the end ofthe year, the additional cost for the
Accelerated pay-out would be approximately $44.700, however there would
be a projected. savings of $84,600 (plus fringe benefit savings) ifthese long-
term employees would be replaced by new employees hired at step one. In
addition, there would be additional savings realized during the recruitment
period the position was vacant.
This compares to a cost of$73,000 if these employees were paid the Lump
Sum paymentthe contract employees receive as an alternative option. The
contract employee's Lump Sum payment is subject to full taxes (including the
City's share of FICA).
RECOMMENDATION:
Non-contract employees were informed of the specifics of this plan on December 3rd.
The intent is to allow the employees to review this over the next several days and make
comments or suggestions. At the December 7th meeting, I will review this with the
Council to gauge support. Assuming Council's concurrence, this would return to the City
Council at the December 21 st meeting for official action, so that it would become
effective January 1,2005.
ACTION REQUIRED:
This will be reviewed with the Council. Assuming interest on the part of the Council,
comments will be taken from employees, and it would then be returned for anticipated
action on December 21 st.
Mark McNeill
City Administrator
MM:th
. CITY OF SHAKOPEE
Memorandum
TO: Mayor and City Council Members
Mark McNeill, City Adm.
FROM: Marilyn Remer, PayrolllBenefits Coordinator.
SUBJECT: Long-Term Service Recognition! Early Retirement Benefits
DATE: November 24, 2004
BACKGROUND INFORMATION:
Early Retirement fucentive
fu late 1991, the City of Shakopee offered an Early Retirement Incentive to employees as
allowed by legislative action to help alleviate budget shortfalls. It was justified by the
assumed savings of the replacement of higher salaried employees with entry -level
salaried employees. The employee was eligible for early retirement if (a) the employee
had worked for the City of Shako pee for at least 15 years; (b) the employee was eligible
for a full or reduced pension upon retirement; and (c) the employee was at least 55 years
old on or before December 31st of that year. (50 for police officers). Two employees
opted for the early retirement incentive at that time. Attachment ~
Long-Term Employee Retirement Pay
Two employees contemplating retirement at the end of 1996 (a police contract employee
and a non-contract public works employee) inquired as to whether the city could assist in
offsetting some ofthe costs of health insurance after retirement. Both long-term
employees had maximum sick balances and requested that unused sick balance be used to
offset the health premium after retirement. As the concept of Post Employment Health
Savings Plans was not available at that time, a Long-term Employee Retirement Benefit
was approved by City Council for those employees in lieu of assistance with insurance
premiums. . Because this benefit requires 25 years of service, it rewards (ed) employees
based entirely on longevity with no relevance to the employee's sick accrual balance or
job performance. Also, it cannot be viewed as an early retirement incentive, as it
encourages employees to remain employed.
City Council approved Letters of Understanding for the two employees until it could be
determined whether the policy was going to be incorporated into the union contracts and
personnel policy. Subsequently, a Retirement Pay! Long-Term Employee Severance Pay
lump sum payment was added to all three union contracts, Attachment B ; however
the Personnel Policy was never modified to include a similar policy for other non-contract
employees. Technically, the public works employee was a non-contract employee who
previously had been a member of the Public Works Union. He received the supplemental
Severance Pay under the provisions of a Letter of Understanding.
2004 Early Retirement Study Group
At the direction of the City Administrator, an employee committee was formed in March,
2004 to get input from a cross-section of non-contract employees and department
,
regarding early retirement incentives. There are, again, some long-term employees
contemplating (early) retirement. The issue of health insurance continuation and the high '"
cost of those premiums are a major factor and deterrence to retirement. It is the desire of
staff to develop an equitable retirement policy for non-represented employees that could
be fairly and non-discriminatorily applied to all non-contract employees, rather than
adopting policy, practice or letters of understanding that are the direct result of individual
negotiations with employees as they retire. The committee was instructed that the
following criteria should be considered: demonstrable savings to the City, preferably both
in the long-term and short-term, i.e. savings when positions are able to be left unfilled,
avoiding lay-offs, or that positions are able to be filled using less experienced employees
who are on lower steps ofthe pay scale.
There are now IRS regulations in place for Health Care Savings Plans. It became apparent
early-on to the committee that the health care savings plan was the tool necessary to
coordinate with a retirement incentive. A health care savings plan is an employer-
sponsored program that allows employees to save money tax-free into an account to pay
medical expenses and/or health insurance premiums on a tax-free basis after termination
of public service.
The City has been participating in Nationwide Retirement Solutions PEHP (Post
Employment Health Plan) since 1/1/02. That benefit coincided with the discontinuation
of a cash reimbursement benefit to employees taking single health insurance. The City
contributes $25.00 per month for each eligible employee. The City has over 20 years of
history with Nationwide with over 50% of eligible employees participating in their
deferred compensation program. Nationwide's PEHP plan as adopted in 2002 was very
new and strictly adhered to IRS regulations. Recent IRS regulations have been issued
allowing limited flexibility to the plans; however Nationwide has not updated their plan
and remains very restrictive.
As the City also has several employees participating in the lCMA Deferred
Compensation plan, lCMA was asked to present theirVantageCare Retirement Health
Savings Plan to the committee. Relying on Private Letter Rulings, theRHS plan was
totally flexible allowing individual employee choices. The city council approved
participation in the lCMA plan in May, 2004. Shortly thereafter, the League ofMN
Cities' consultant Darcy Hitesman, ESQ. released an advisory bulletin with concerns
about certain health savings plan's compliance with IRS Regulations. The committee
invited Ms. Hitesman to address the legal concerns and objectives of various plan
providers and specifically the flexibility of the lCMA as it relates to IRS guidelines. IRS
regulations do not allow any individual employee choice, and are very unlikely to change
that requirement. MS. Hitesman advised the committee the lCMA was in violation of
IRS Regulations and would not recommend the City's participation in that plan.
The committee invited several vendors to present their health savings plan to the group.
The committee unanimously agreed to recommend the State of Minnesota's HCSP. Laws
of Minnesota 2001, Chapter 352.98 authorized the Minnesota State Retirement System to
offer this program to state employees, as well as all other government subdivisions.
Many metro cities are participating in this plan; meets the IRS regulations and has the
lowest administrative fees.
1991 EARLY RETIREMENT POLICY
. ATTACHMENT If
: RESOLUTION NO. 3483
.:
A RESOLUTION OF THE CITY OFSHAKOPEE, MINNESOTA, ADOPTING AN
EARLY RETIREMENT POLICY.
WHEREAS, the City is in the process of bUdgeting for the
upcoming fiscal year, and has learned it may face a reduction in
work force; and
WHEREAS, the City has been approached by employees who are
interested in taking early retirement; and
WHEREAS, before the budget is finalized,the City would like
to allow employees desiring to take early retirement an option to
do so; and
WHEREAS, the City has a small number of employees, and
therefore would be crippled if a large number of employees in any
given department t?Ok early retirement.
NOW THEREFORE, BE IT RESOLVED BY THE CITY COUNCIL OF THE CITY OF
SHAKOPEE, MINNESOTA, AS FOLLOWS:
That the an Early Retirement Policy is hereby adopted, which
shall provide as follows:
EARLY RETIREMENT.
City employees may elect early retirement, subject to the
provisions set forth below.
An employee is eligible for early retirement if (a) the
employee has worked for the City of Shakopee for at least 15
years; (b) the employee is eligible for a full or reduced pension
upon retirement; and (c) the employee shall be at least 55 years
old on or before December 31, 1991, unless the employee is a
police Officer, in which the minimum age shall be 50.
Such a retiring employee would receive a lump sum payment
covering the following items:
1. All accumulated unused vacation time.
2. Up to one-third of accumulated unused sick leave, up to
a maximum of 960 hours. (Police officers 45% of 960
hours. )
3. A percentage of the salary times years of service based
on the following formula: 1% for each of the first 15
years of service, plus an additional 0.2% for each year
thereafter, up to a maximum rate of 3%.
These payments for vacation, sick leave, and years of service
would all be calculated on the basis of the employee's 1991 base
salary or wage scale (excluding overtime).
~
"
These benefits would be in lieu of any benefits described in
any existing personnel policy or contract. This early retirement
package must be requested, in writing to the City,Administrator,
by an interested employee on or before 4:30 p.m., November 29,
1991, with the employee retiring by December 31, 1991. A partial
or conditional acceptance will not be considered. Any employee
taking early retirement shall be required to sign appropriate
documents prepared by the City Attorney.
A maximum of two employees per department may take early
retirement. If more than two employees in the same department
request it, they shall be selected on the basis of the following:
the most highly placed (with department head being the highest
position) employees shall have priority over lower employees. If
two employees are in the same job position, the employee with the
most months of service with the City shall have priority over the
employee with fewer months.
.
Passed in ~~ session of the City Council
of the city of Shako ee, M nnesota, held this t., It. day of
_'1\~.MA , 1991.
,
Ma~~Y~ShakOpee
Attest: City Clerk
form: .~.m:J---tfp ,J? City Attorney
[EARLYRET] . '6/
AMENDMENT
Resolution amended by changing the retirement date from
December 31, 1991 to January 2, 1992.
Amendment approved in adjourned regular session of the City
Council of the City of Shakopee, Minnesota, Held this 17th day of
December, 1991.
,Mayor
Clerk
2 ,City Attorney
POLICE OFFICER CONTRACT ATTACHMENT {)
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ARTICLE XXV. SEVERANCEPAY
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25.1 Any employee who is separated from his\her position by retirement, discharge or
resignation shall receive severance pay of forty- five percent (45%) of a maximum of
rune hundred sixty (960) hours of accumulated regular sick leave calculated on the
basis of his \her current wage scale. Should any employee resign without giving two
(2) weeks written notice, except for reasons of ill health, they shall forfeit his\her
right to all accumulated leave.
25.2 Employees hired after January 1, 1981 will be entitled to severance pay after five (5)
years of service.
25.3 Long term employees shall be eligible for a lump sum payment at the time of
retirement, as provided herein:
a. Eligibility requirements:
1.) Minimum years of service equal to 25; and
2.) Employee is eligible for full or reduced pension
upon retirement; and
3.) Minimum age of 50 years at the time of retirement.
b. Lump sums to be based as follows:
1.) Completion of 15 years of continuous service = 1 % of regular
annual base pay for each year of continuous service.
2.) Thereafter an additional .2% for each year up to a maximum
limit of3%.
(16 years = 15.2% of regular annual base pay
17 years = 15.4% of regular annual base pay
Etc.
3.) The maximum limit is an additional 3% above the 15% for
completion of 15 years of continuous service.
(Completion of 30 years or more of continuous
service = 18% of regular annual base pay)