March 19, 2008, Introduced by Reps. Hammel, Alma Smith, Spade, Valentine, Johnson, Coulouris and Meadows and referred to the Committee on Retiree Health Care Reforms.
A bill to authorize and create irrevocable trusts for the
purpose of holding, investing, and distributing assets to be used
for certain postemployment health care benefits; to set forth
certain rights that public employees have in retirement health care
benefits under certain circumstances; to provide for the
establishment and amendment of certain irrevocable trust
agreements; and to prescribe certain powers and duties of certain
retirement systems, state departments, public officials, and public
employees.
THE PEOPLE OF THE STATE OF MICHIGAN ENACT:
Sec. 1. This act shall be known and may be cited as the
"public employee retirement health care funding act".
Sec. 2. As used in this act:
(a) "Department" means the department of management and
budget.
(b) "Employer contributions" means the amount transferred by
an employer to a funding account or a health reimbursement account.
(c) "Funding account" means an account created pursuant to
section 3(6) for the deposit of funds and payment of retirement
health care benefits for a member under the applicable retirement
act.
(d) "Funding account dependant" means 1 or more of the
following:
(i) For a past member of the retirement system created under
the state employees retirement act, 1943 PA 240, MCL 38.1 to 38.69,
a dependent as that term is used in section 20d of the state
employees retirement act, 1943 PA 240, MCL 38.20d, or a "health
benefit dependent" as that term is defined in section 54 of the
state employees retirement act, 1943 PA 240, MCL 38.54, whichever
is applicable.
(ii) A health insurance dependent as that term is defined in
section 91 of the public school employees retirement act of 1979,
1980 PA 300, MCL 38.1391.
(iii) A retirement allowance beneficiary as that term is defined
in section 109 of the judges retirement act of 1992, 1992 PA 234,
MCL 38.2109, or a health benefit dependent as that term is defined
in section 705 of the judges retirement act of 1992, 1992 PA 234,
MCL 38.2655, whichever is applicable.
(iv) A survivor as that term is defined in section 13a of the
Michigan legislative retirement system act, 1957 PA 261, MCL
38.1013a, a beneficiary of a deceased retirant as that term is used
in section 50b of the Michigan legislative retirement system act,
1957 PA 261, 1957 PA 261, MCL 38.1050b, or a health benefit
dependent as that term is defined in section 65 of the Michigan
legislative retirement system act, 1957 PA 261, MCL 38.1065,
whichever is applicable.
(v) A retirement allowance beneficiary as that term is defined
in section 4 of the state police retirement act of 1986, 1986 PA
182, MCL 38.1604, or a dependent as that term is used in section 42
of the state police retirement act of 1986, 1986 PA 182, MCL
38.1642.
(e) "Health reimbursement account" means an employer-sponsored
individual account within the irrevocable trust administered by the
trustees that allows a member and his or her employer to save money
for reimbursement of medical expenses that will be incurred on
behalf of the member or his or her dependents after the member
becomes a past member.
(f) "Health reimbursement account dependent" means a past
member's spouse or a surviving spouse and any individual who is
considered the past member's dependent under section 152 of the
internal revenue code, 26 USC 152, determined without regard to
section 152(b)(1), (b)(2), or (d)(1)(b) of the internal revenue
code.
(g) "Mandatory contributions" means required contributions
made under the applicable retirement act. The department shall
administer contributions made to the trust so that they may be
characterized in the manner that the department determines is most
favorable under the internal revenue code, 26 USC 1 to 1789.
Mandatory contributions also may include any other amounts
established by the employer which may be treated as picked up by
the employer to the fullest extent permitted by the internal
revenue code.
(h) "Medical expenses" means expenses incurred by a past
member or his or her health reimbursement account dependents that
satisfy all of the following conditions:
(i) The expenses are medical care expenses that would otherwise
qualify for a deduction under section 213(d) of the internal
revenue code, 26 USC 213(d), without regard to the income threshold
in section 213(a) of the internal revenue code, 26 USC 213(a).
(ii) The expenses have not been and will not be reimbursed by
any other source.
(iii) The expenses must have been incurred while the individual
is a past member or after the death of a past member.
(iv) The individual properly and timely substantiates the
expenses in a manner established by the department.
(i) "Member" means a person who is a member, former member,
deferred member, qualified participant, or former qualified
participant as determined under the applicable retirement act.
(j) "Participating member" means a member who is required to
make mandatory contributions by the applicable retirement act to
his or her health reimbursement account.
(k) "Past member" means a former member who has retired with
retirement health care benefits payable by a retirement system or a
former member who has terminated employment and has a health
reimbursement account.
(l) "Retirement health care benefits" means expenses for
medical, dental, and vision to be paid for past members or their
funding account dependents under the applicable retirement act and
medical expenses paid using funds from a health reimbursement
account provided under this act.
(m) "Retirement act" means 1 or more of the following:
(i) The state employees' retirement act, 1943 PA 240, MCL 38.1
to 38.69.
(ii) The public school employees retirement act of 1979, 1980
PA 300, MCL 38.1301 to 38.1408.
(iii) The judges retirement act of 1992, 1992 PA 234, MCL
38.2101 to 38.2670.
(iv) The state police retirement act of 1986, 1986 PA 182, MCL
38.1601 to 38.1648.
(v) The Michigan legislative retirement system act, 1957 PA
261, MCL 38.1001 to 38.1080.
(n) "Retirement system" means a retirement system established
under a retirement act.
(o) "State" means this state.
(p) "Trust" means an irrevocable trust created under section
3(1) of this act.
(q) "Trustee" means a member of a retirement system board.
(r) "Voluntary employee contributions" means voluntary amounts
contributed by a member or participating member into a health
reimbursement account. To the extent required by applicable law,
voluntary employee contributions shall not be made through a salary
reduction election under a cafeteria plan pursuant to section 125
of the internal revenue code, 26 USC 125.
Sec. 3. (1) One irrevocable trust is authorized and created by
this act for each retirement system. An irrevocable trust
established under this subsection shall at all times be established
and administered in accordance with section 115 of the internal
revenue code, 26 USC 115.
(2) The governing body of each retirement system shall be the
grantor and shall administer the irrevocable trust created for that
retirement system in order to pay retirement health care benefits
to its past members and their funding account dependents or health
reimbursement account dependents. The members of the retirement
system board shall act as the trustees of the irrevocable trust for
that retirement system. The trustees shall adopt a written trust
agreement that meets all of the requirements set forth in section
9. The trustees of the irrevocable trust may establish and adopt
policies and procedures for administering the irrevocable trust.
(3) Each trust shall be managed and operated separately and
independent of the other retirement system trusts. The trustees may
contract with public and private entities for the provision of
bookkeeping, benefit payments, and other plan functions. The
department, the department of treasury, and the department of the
attorney general may provide services to the trust as requested by
the trustees.
(4) The state treasurer shall be the fiduciary of the
irrevocable trusts and shall invest the assets in the trusts in
accord with the public employee retirement system investment act,
1965 PA 314, MCL 38.1132 to 38.1140m. The state treasurer has the
exclusive authority and responsibility to employ or contract with
personnel and for services that the state treasurer determines
necessary for the proper investment of the assets in the
irrevocable trust.
(5) Each trust shall receive state appropriations, employer
contributions, employee contributions, investment earnings, refunds
and reimbursements, and other permitted deposits, and shall make
distributions for the payment of retirement health care benefits
authorized by the trustees for the administration of such trust.
The trustees are authorized to establish an administrative and
investment fee structure to be charged against the funding account
and the health reimbursement accounts within the trust to defray
the costs of administering the trust. An irrevocable trust
established under this section shall be kept separate from the
pension assets of retirement systems.
(6) A funding account shall be established by the trustees for
the funding and prefunding of payments of retirement health care
benefit obligations, and separate accounts for investment earnings
and for administration of the trust may be established. Past
members in the aggregate shall have contractual rights to the
assets in the funding account for the payment of retirement health
care benefits required under the applicable retirement act.
(7) Individual health reimbursement accounts shall be
established and maintained within each trust to receive and hold
the funds collected under section 10. All health reimbursement
accounts shall be established in a manner that complies with all
relevant statutory provisions, regulatory provisions, and internal
revenue service rulings governing health reimbursement
arrangements. Deposits to health reimbursement accounts shall
include employer contributions and other permitted contributions
the deposit of which is authorized by this act.
(8) The governing body of a retirement system may from time to
time authorize the deposit into the funding account of any eligible
funds on deposit in an account within its retirement system for the
purpose of payment of retirement health care benefits of its
members. Distributions from the funding account may be made to
satisfy the requirements of the retirement system for all
retirement health care benefits provided by the retirement system.
(9) The trustees shall cause the annual financial statements
of the trust to be prepared in accordance with generally accepted
accounting principles and an audit to be conducted of those
financial statements by a qualified independent certified
accounting firm for each fiscal year in accordance with generally
accepted auditing standards.
Sec. 4. (1) Except as otherwise provided in this section,
section 8, and section 18, assets contributed to the irrevocable
trust are irrevocable and may not be refused, refunded, or returned
to the employer or employee making such contribution.
(2) To the extent permitted under state and federal law,
vested contributions to a health reimbursement account and any
investment income may be distributed to a deceased member's or past
member's beneficiaries or estate if a balance of funds exists in
the deceased member's or past member's health reimbursement account
and all retirement health care benefits have been paid for the
deceased member or past member and all of his or her funding
account dependents or health reimbursement account dependents.
Sec. 5. The assets of the irrevocable trust are to be used
solely to perform an essential function of state government. The
trust may only provide retirement health care benefits to eligible
past members and their funding account dependents or health
reimbursement account dependents under the provisions of the
applicable retirement act, or to pay fees and expenses for the
administrative costs in carrying out this essential governmental
function.
Sec. 6. The assets of the irrevocable trust and the right of a
member or past member of a retirement system to retirement health
care benefits shall not be subject to execution, garnishment,
attachment, the operation of bankruptcy or insolvency laws, or
other process of law and shall be unassignable.
Sec. 7. The assets of the irrevocable trust shall be used
exclusively for the benefit of past members and their funding
account dependents or health reimbursement account dependents, and
shall not be diverted for a purpose other than the payment of
retirement health care benefits and the administrative costs of
providing such benefits.
Sec. 8. (1) Except as provided in section 4(2), any assets
remaining in any individual health reimbursement account within the
irrevocable trust after all payments for costs of eligible
retirement health care benefits for the individual past member and
any eligible funding account dependents or health reimbursement
account dependents of the past member have been paid shall be
distributed to the funding account within the irrevocable trust.
(2) Any assets remaining in the funding account after all
payments for eligible retirement health care benefits have been
paid and all other liabilities of the trust have been satisfied
shall be distributed to this state or other employers within the
applicable retirement system so long as the employers are
organizations the income of which is excluded under section 115(1)
of the internal revenue code, 26 USC 115.
(3) Upon dissolution of the irrevocable trust, any assets
remaining after the payment of debts and the satisfaction of
liabilities are to be distributed to 1 or more states, political
subdivisions of states, the District of Columbia, or other
organizations the income of which is excluded under section 115(1)
of the internal revenue code, 26 USC 115.
Sec. 9. The written trust agreement for each retirement system
shall contain all of the following provisions consistent with this
act:
(a) Recitals describing the creation and purpose of the trust.
(b) Language reflecting the requirements of sections 4 through
7.
(c) Sections outlining the management and operation of the
trust.
(d) A description of the various accounts that carry out the
functions of the trust.
(e) Provisions setting forth the powers and duties of the
trustees.
Sec. 10. (1) If a member or participating member has a
mandatory percentage or a fixed dollar amount of salary reduced for
contribution to the trust as a result of a collective bargaining
agreement or other terms of employment and this section, or a
provision of the applicable retirement act, the deduction together
with any employer contributions under this section shall promptly
be credited to that member or participating member's individual
health reimbursement account within the trust. To the extent
permitted by applicable law, any mandatory employee contribution
shall be treated as a salary increase that has been foregone by the
employee.
(2) A participating member shall contribute an amount to his
or her health reimbursement account as required within the
applicable retirement act.
(3) The employer of a participating member shall contribute to
a participating member's health reimbursement account within the
trust an amount as required within the applicable retirement act.
(4) A participating member or other member within a retirement
system may voluntarily contribute an amount to the health
reimbursement account in a whole percentage ranging from 1% to 5%
of the compensation paid to the participating member or other
member, subject to any limit provided under state or federal law.
(5) The employer of a participating member or other member
within the retirement system may contribute an amount to the
participating member's or member's health reimbursement account as
set forth in the applicable retirement act, as agreed to in a
collective bargaining agreement or other terms of employment.
(6) A participating member shall contribute an amount to the
funding account as required within the applicable retirement act.
(7) The employer within a retirement system may contribute
amounts to the funding account as set forth in the applicable
retirement act, as agreed to in a collective bargaining agreement
or other terms of employment for the prefunding of retirement
health care benefits.
(8) This state or the employer may make other contributions to
the funding account for the prefunding of retirement health care
benefits.
Sec. 11. (1) A past member is 100% vested in mandatory and
voluntary employee contributions made to his or her health
reimbursement account.
(2) A past member is vested in employer contributions made to
his or her health reimbursement account according to the following
schedule:
(a) 50% vested after earning 2 years of service as determined
under the applicable retirement act.
(b) 75% vested after earning 3 years of service as determined
under the applicable retirement act.
(c) 100% vested after earning 4 years or more of service as
determined under the applicable retirement act.
(3) A past member shall have contractual rights to
reimbursement of medical expenses under this act to the extent such
funds exist in his or her health reimbursement account.
Sec. 12. (1) The trustees shall establish a separately written
plan document which shall govern the terms and conditions of both
of the following:
(a) Reimbursement of expenses for medical, dental, and vision
care with the terms being consistent with the funding and payment
of the expenses under the applicable retirement act.
(b) Reimbursement of medical expenses from the health
reimbursement accounts in a manner that complies with all
applicable statutory provisions, regulatory provisions, and
internal revenue service rulings governing health reimbursement
arrangements.
(2) If the governing board of a retirement system has made a
transfer described in subsection (1)(a), the trust shall use the
funds in the funding account to satisfy the requirements of the
retirement system for all retirement health care benefits provided
by the retirement system consistent with this act and the plan
document established under this section.
(3) Any funds in the funding account may be counted toward and
used in the calculation of the annual required contribution for
purposes of the annual financial statements prepared pursuant to
section 3(9).
(4) Following termination of employment, the trust for the
applicable retirement system shall reimburse a past member or the
dependents of the past member from the past member's health
reimbursement account, as appropriate, at least quarterly, for
medical expenses incurred by the past member or the dependents of
the past member for health care benefits authorized under the
applicable retirement act but not paid by the retirement system
until the past member's health reimbursement account is exhausted.
(5) Notwithstanding anything to the contrary, claims that are
incurred before the past member became entitled to receive
reimbursements under the applicable retirement act or this act are
not eligible medical expenses.
Sec. 13. (1) If the department receives notification from the
United States internal revenue service that this act or any portion
of this act will cause any retirement system or health
reimbursement account to be disqualified for tax purposes under the
internal revenue code, or prevent any irrevocable trust from
meeting the requirements of section 115 of the internal revenue
code, 26 USC 115, then the portion that will cause the
disqualification does not apply.
(2) The provisions of this act are severable. If any part of
this act is declared invalid or unconstitutional, that declaration
shall not affect the remaining part of this act.
Sec. 14. The trusts created by this act shall not be deemed to
be invalid by reason of any indefiniteness or uncertainty of the
persons designated as beneficiaries in this act and agreements
creating the trusts, nor shall the trusts be deemed to be invalid
as violating any existing law against perpetuities or against
suspension of the power of alienation of title to property or
against trusts for the purpose of the accumulation of income, but
each trust may continue for the amount of time that may be
necessary to accomplish the purpose for which it was created.
Sec. 15. All assets and income of the trusts shall be exempt
from taxation by the state or any political subdivision of this
state. Except as provided in section 4(2), distribution from the
trusts will not be treated as taxable income to the past members or
their funding account dependents or health reimbursement account
dependents by this state or any political subdivision of this
state.
Sec. 16. (1) A trustee shall not be any of the following:
(a) Personally liable for any liability, loss, or expense
suffered by the trust, unless the liability, loss, or expense
arises out of or results from the willful misconduct or intentional
wrongdoing of the trustee.
(b) Responsible for the adequacy of the trust to meet and
discharge any obligation under the applicable retirement act and
this act.
(c) Required to take action to enforce the payment of any
contribution or appropriation to the trust.
(2) The trustees may be indemnified by the trusts and from the
fund of the trusts against costs, liabilities, losses, damages, and
expenses, including their attorney fees, as more fully provided in
the respective trust agreements, unless such costs, liabilities,
losses, damages, or expenses arise out of or result from the
willful misconduct or intentional wrongdoing of a trustee.
Sec. 17. Except for retirement health care benefits to be paid
from amounts within a health reimbursement account, nothing in this
act shall be construed to define or otherwise grant any right or
privilege to health care benefits or other postemployment benefits
to any person other than those health care benefits or other
postemployment benefits, rights, and privileges previously or
already granted to members and past members and their dependents by
the applicable retirement act. This act is not intended to assure
or deny to any existing or future employee, past member, any of
their funding account dependents or health reimbursement account
dependents, or any other person any right of entitlement to any
health care benefit or other postemployment benefit or limit or
otherwise restrict the ability of this state or any employer to
modify or eliminate any existing or future health care benefit or
other postemployment benefit.
Sec. 18. If a change or error in any records of the trust
results in a member, past member, or his or her funding account
dependent or health reimbursement account dependent paying into or
receiving from the trust more or less than the member, past member,
or his or her dependent should have paid or would have been
entitled to receive had the records been correct, the trustees
shall correct the error, and as far as practicable, shall adjust
the payment to correct for the change or error.