HOUSE BILL No. 5913

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.