PRIME Choice Plan

If you currently offer your employees an accumulated leave pay* benefit - it is probably costing you - and them - more than it needs to.

Developed specifically to sometimes eliminate -and help defer- taxes on employees' accumulated leave benefits. The PRIME Choice Plan enables employers to reap significant cost savings and employees to see enhanced payouts - all through IRS tax-compliant options.

Simply stated: The PRIME Choice Plan converts special forms of compensation at retirement or termination of employment into an employer contribution.

Special forms of compensation include:

  • accumulated sick leave
  • vacation pay
  • retirement stipends pay outs
  • paid time off (PTO)
  • early retirement incentives
The tax implication isn't obvious - is your organization even aware of it? With most benefit plans, the retiring and terminated employees decide how they want to receive their accumulated leave payout - and if one option presented to them is cash, all options are considered taxable. This leaves them - and you - exposed to unnecessary taxes and risks through the IRS code that governs constructive receipt* and deems accumulated leave benefits as taxable, regardless of the type of payout requested.

Through the PRIME Choice Plan, the employer (or its agent) asks the employee (via an exit interview) how they would like the payout handled, and then offers the employee the appropriate plan for their accumulated leave compensation payout, from these two options:
  • Medical Reimbursement Trust (PRIME Plan) - enables employees to leave money in an account to pay for health insurance premiums and out-of-pocket medical expenses tax-free during retirement
  • Special Pay Plan - enables employees to take the full amount in a cash payment
Simple stated: The PRIME Choice Plan is a written benefit plan that lets employers provide options without taxation of the health benefit. No matter which option is chosen, the plan that best suits the needs of each retiree is utilized.

Without PRIME Choice With PRIME Choice
Taxes employer and employee on accumulated funds payout Converts special forms of compensation at retirement or termination of employment to an employer contribution into either a Medical Retirement Trust (the PRIME Plan), or a Special Pay Plan (qualified IRC Section 401(a), 403(b), or Section 457 Deferred Compensation Plan).
Employees:
  • Taxes could take a significant portion of the total payout
  • Healthcare costs could quickly reduce total funds
 Disbursements can be tax-deferred or tax-free
Employers:
  • Must figure out how to pay an unfunded liability
  • May owe significant Medicare and social security taxes on the accumulated leave payout
  • At risk for obscure tax issue called constructive receipts - and possible penalties if appropriate federal and state taxes were not withheld
 No cost to employers, and no serious tax risks (i.e. constructive receipts)
Employers and their retirees will see significant advantages through the PRIME Choice Plan.

Save your company and your employees from unnecessary taxation by giving employees a choice between tax-free health benefits or a tax-advantaged cash payout, with the PRIME Choice Plan, the plan that benefits everyone.

Here is how the PRIME Choice Plan works:

1. Set up a single program with two tax-advantaged options
A tax-free Medical Trust Account (PRIME Plan) that allows participants (their spouse and qualified dependents) to use the payout to pay for health insurance and other qualified medical expenses without federal, state, or FICA taxation; and no sales or surrender charges.
AND
A tax-deferred Special Pay Plan for IRC Sec 401(a), 403(b) or a 457 Plan, if the employee doesn't need money for healthcare. This offers complete liquidity, deferred federal and state taxes, and no FICA taxation or sales or surrender charges.

2. Select the right option for each individual employee via exit interviews.

3. Guarantee compliance and streamline administration of the plan. Constructive receipt evaporates as an applicable issue because the employer is now making the determination of payout. Plan administration requires little-to-no additional administrative work over other post-retirement accounts, and sometimes it evens streamlines the process.

The PRIME Choice Plan deftly navigates the applicable tax rules and can enable your organization to realize the advantageous business outcomes of this benefit, even as you save more money and stave off tax risks in doing so.

You and your retiring employees will agree: Providing a tax-free health benefits or a tax-advantaged cash payment benefits everyone.

PRG is ready to help you transition from your current plan into the PRIME Choice Plan. Once your organization approves plan implementation, we handle all meetings, exit interviews, and paperwork with the retirees, as well as future communication with employees. For more information and to learn how your organization can benefit from our PRIME Choice Plan, please contact us.

*Accumulated leave pay can include sick, vacation, or any other unused paid time off (PTO)

*Constructive receipt: the IRS treats benefits as taxable income in some situations even if the employee doesn't receive the benefit as cash because income, according to the IRS is received when an amount is credited to an account or made available to the recipient without restriction. Possession of cash is not a requirement, so this means that any time employees can choose how they want to receive their accumulated leave pay, and if one of their choices is cash, it makes all options taxable income.

The exit interview removes employee choice while still ensuring the right choice is made. For example, if schoolteacher Susan retires and qualifies for a $15,000 payout, but she is also facing a $750-per-month health premium for herself and her husband. The employer could divert the money to a medical trust that would then pay for year's worth of health premiums. No FICA, federal, or other state taxes will be assessed on the amount, so that Susan can reap the benefit of the full amount.

On the other hand, if Susan doesn't need the money for healthcare, she might be upset if the organization put five figures into a medical trust that she'd never use. A 401(a) or 403(b) account option gives her tax-deferred access to the money, in an account with complete liquidity.

Either option reduces or eliminates the taxes owed by the employer. Both enable the organization to provide a benefit that can save both participant and employer money, at no cost to the employer.