Simple, cost effective with a prudent
One of the nice things about pre-funding retiree health benefits is that there are no strict funding rules to adhere to, such as there are with pensions. You may adopt a flexible funding policy under which it contributes larger amounts in the good years and no additional amounts in lean years. Many agencies have budgeted a modest additional amount of covered payroll for contribution to the trust. And remember: a trust is only “irrevocable” in that once money is contributed to it, it must be used for retiree health benefits only. The SISC GASB 45 Trust is an irrevocable trust under California State law, and IRC Section 115, however, should the situation occur, the SISC Trust Agreement allows for assets in excess of liabilities to be returned to the employer.
It’s important to face up to the mounting costs of retiree health sooner rather than later. If you can’t afford the benefits today, odds are you’ll be even less able to afford them five or ten years from now. Establishing a trust for pre-funding now will increase your ability to meet your agency’s future obligations, and will help your Board arrive at a funding policy that is optimum for your particular circumstances.