| ATTENTION: | Personnel and Payroll Officers |
|---|---|
| SUBJECT: | Treatment of Retiree Health Fund Contributions |
In recent months a number of errors have occurred in treatment of Retiree Health Fund contributions. In some cases, OPEB deductions have been shut off too early for employees who are required to make them; in others, OPEB refunds have been paid to those who are ineligible to receive them. As a result, the Division's Employee Benefits Unit (EBU) is faced with the unwelcome task of collecting missed contributions or erroneously refunded OPEB amounts from those who are disinclined to make such payments.
The purpose of this memorandum is to clarify the correct treatment of OPEB deductions for separating employees who are or may be eligible for retiree health benefits and to explain the correct treatment of OPEB deductions when including a refund in a terminating employee's final paycheck.
I. Retiring/Terminating Employees Eligible for Retiree Health Benefits.
Depending on the date of hire, healthcare-eligible employees are required by applicable SEBAC Agreements to contribute to the Retiree Health Fund for either 10 years (hired before July 1, 2017) or 15 years (hired on or after July 1, 2017). The duration of each employee's Retiree Health Fund contribution is monitored in CORE-CT. The system will automatically terminate the deduction when an employee reaches the required number of deductions.
Employees who will be eligible for retiree health benefits--either upon direct transition to retirement or with vested rights--are not eligible for a refund of Retiree Health Fund contributions. Current employees who are retiring with an open OPEB, OPE2, OTRS or OTR2 deduction code in place have not yet completed 10 years of contributions. For that reason agency personnel are required to leave these deduction codes open for the employee's final paycheck.
We recently found that an agency had closed the Retiree Health Fund deduction before issuing the final paycheck to a retiring employee eligible for retiree health benefits. This meant that the Retiree Health Fund contribution was not made on his final paycheck.
Upon discovery, the Comptroller's office sought repayment of the missed contribution from the retiree. This error-far from helping-actually cost the employee more money than if the OPEB deduction had remained in place. The employee paid state and federal taxes, plus FICA on his entire salary and vacation leave payout. The missed OPEB contribution was 3% calculated on the gross amount of his salary and vacation leave (with no FICA deducted). The employee had to use post-tax dollars to repay the gross amount of the missed contribution, which increased the "cost" to him by approximately 33%.
A recent audit revealed that an OPEB refund was issued to a terminating employee with sufficient service to qualify for future retiree healthcare benefits. The agency was directed to secure repayment from its former employee; however, that has not yet occurred. If not repaid, the erroneous refund will create a large future liability that must be dealt with at the time or retirement. The employee paid state and federal income tax, plus FICA on the OPEB refund. She will need to repay the gross amount of the refund as a condition of receiving her retiree health benefits.
II. Employees with Pending Disability Retirement Applications
Employees who terminate service while applying for disability retirement benefits present a special challenge. Disability retirees for service-related conditions will receive retiree health benefits without meeting specific service requirements. For that reason, agencies are cautioned against issuing OPEB refunds to employees with pending disability retirement applications, even if the employee would otherwise have insufficient service to qualify for retiree health benefits.
The CO-1301 form expressly asks for disclosure of a pending disability retirement application and advises against issuance of refunds. Even where there has been initial denial of disability retirement benefits, no OPEB refund should be made until all appeals have been decided.
Two recent cases illustrate the difficulties created by premature refunds while disability retirement applications are pending. In the first case, a terminating employee applied for a service-connected disability retirement and received an initial denial. He applied for and received a refund of his OPEB contributions without disclosing the disability retirement application. He then appealed denial of disability retirement benefits and was ultimately awarded disability retirement with retiree health benefits. The EBU then had to pursue collection of the OPEB refund from the retiree.
In another instance, an agency issued a refund of Retiree Health Fund contributions to the parents of a deceased employee who did not qualify for preretirement death benefits. At the time of death, the employee had a pending disability retirement application, which the agency did not disclose. The employee was posthumously awarded disability retirement benefits, and his spouse and children became entitled to retiree health benefits. The EBU was then forced to seek recovery of the Retiree Health Fund refund from the deceased employee's parents.
III. Separating Employees without Retiree Healthcare Eligibility
Before issuing a refund to a terminating employee, agencies should make sure that the employee is not eligible for future retiree healthcare benefits. If there is any question about eligibility, contact the EBU for assistance before proceeding with a refund.
Once it has been determined that an employee is eligible for a refund (and not applying for disability retirement) the agency should check to see whether the employee has any outstanding obligations, such as unpaid health premiums, that need to be repaid and process the refund to occur in the final paycheck. The Retiree Health Fund deduction must be closed the Tuesday prior to pay confirm for the final paycheck. If it is not closed out, an additional OPEB contribution will be collected, which will then cause the refund amount to be incorrect.
IV. CONCLUSION
Agency Payroll and Human Resources personnel with questions about this memorandum should e-mail ebu.osc@ct.gov or telephone 860-702-3543.
Very truly yours,
THOMAS C. WOODRUFF, Ph.D.
Division Director
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