New Election Opportunity for Retiree Health Options Due to Contribution Rate Changes

As you are aware, the new Retiree Health benefit for health-eligible employees included three options (A, B and C).  Employees made their “irrevocable” option selection earlier this year.  However, despite the tax advice from the City’s outside counsel which had influenced the negotiations over the Option A and B employee contribution rates, the City has subsequently determined that the CalPERS Trust mechanism — which it intended to utilize when collecting pre-tax employee contributions under Options A and B — is not available and further, on the recent advice of its outside tax counsel, there is no equivalent trust mechanism available to the City to replace the CalPERS Trust mechanism.

The result of these developments is that these Option A and B contributions cannot be deducted from employee paychecks on a pre-tax basis (taken from gross pay before taxes) as planned.  The City must instead collect these contributions from employees on a post-tax basis (taken from net pay after taxes).  Since our 15-year Retiree Health MOU expressly states that Option A and B contributions will be deducted from employee paychecks on a pre-tax basis – which is, of course, more favorable to employees than a deduction taken post-tax, the City’s Management Team contacted MEA to meet and confer over a fair solution to this unanticipated development.

Having now met and conferred with MEA and the other City employee unions over this situation, we have reached a tentative agreement with the City to amend the 15-year MOU to LOWER the rates for Option A and B employee contributions by 29% in order to mitigate this change from pre-tax to post-tax.   The 29% reduction in Option A and B contribution rates is based on a reasonable determination of the high end of the average tax rate paid by City employees.  This rate may be less than the actual tax rate paid by some City employees but it will be higher than the rate paid by most, meaning this change will be favorable for most employees.

The 29% reduction means that the Option A contribution for General employees will be $32.11 per pay period taken on a post-tax basis instead of $45.23 per pay period taken on a pre-tax basis.  The Option B contribution for General employees will be $16.05 per pay period taken on a post-tax basis instead of $22.61 per pay period taken on a pre-tax basis.  The contributions collected will be immediately deposited by the City into a designated fund and used exclusively to pay for its Retiree Health benefit obligations.

Also, because this tax-related adjustment in Option A and B contribution rates may influence employees’ decision-making, the City has agreed that every affected employee will have another brief opportunity to make their “irrevocable” selection.

The City Council will vote on this tentative agreement next Tuesday, May 8^th.  If approved, the terms of the tentative agreement amending the 15-year MOU will be implemented as follows:

(1) On May 10^th the City will send an e-blast internal communication explaining this issue and will provide you with updated election materials and a new “Irrevocable Election Form.”

(2) A new election period will begin with this May 10^th e-mail distribution and will END ON MAY 18^th.

(3) Your paycheck on June 8^th will be the first to show these Option A and B deductions for the pay period which begins on May 25^th.  THERE WILL BE NO RETROACTIVE DEDUCTIONS as a result of the delayed implementation.

(4) The Option C monies for employees eligible to be funded on April 1, 2012 will also be wired to the San Diego Employees’ Retiree Health Trust on June 8, 2012.

For the vast majority of employees, the Option A and B contribution rate adjustments will have no effect on the Option they already chose and they will not need to submit a revised election form.  By doing nothing at all, they will preserve the election they already made before the prior February 1^st deadline.

For other employees, these adjusted Option A and B contribution rates may influence them to choose differently.  And for some — who may have been having second thoughts about the Option they chose for reasons unrelated to this tax adjustment issue — this will effectively be an opportunity to have a “second bite at the apple” in making this irrevocable choice of a Retiree Health Option.

Please note that the City will NOT be deducting any Option A and B contributions on a retroactive basis.  While the 15-year MOU called for these contributions to begin with the first pay period that begins on or after April 1^st, MEA opposed and the City agreed that no retroactive deductions would be made back to that date.  Thus, these adjusted Option A and B amounts will not be taken until your June 8^th paycheck for the pay period ending May 25^th.

Also, for those employees who chose Option C and who were eligible for funding on April 1, the re-opening of the election process for this “re-do” will result in a slight delay from the scheduled funding date of your individual Option C account from late May until June 8^th.  In fact, the reason the new election period is only one week (May 10^th through May 18^th) is to prevent an even longer delay in getting these Option C accounts funded.

Assuming this tentative agreement is approved next Tuesday, watch for the City’s communication and updated election materials which should arrive on May 10^th.   In view of the relatively short turn-around time for action, we wanted to give you a heads up as to what is coming and why.  When you receive the City’s communication, it will include a new Option Election Form.  Remember — if you do not want to make any change in your prior selection, you do nothing.  If you do wish to make a change (for any reason), you MUST SUBMIT YOUR SELECTION FORM BY MAY 18^th.

If you have any questions or need more information, please do not hesitate to call MEA at 619-264-6632.