Sick Leave and Other One-Time Incentive Payouts

Many public sector organizations offer retirees a payout for unused sick leave, vacation pay, or early-retirement incentives. If these benefits are distributed as wages, employers must pay all wage-related costs, including the FICA (Social Security and Medicare) tax. Additionally, after income withholding and FICA tax, the retiree receives only a portion of the full benefit, and the value of the early-retirement incentive is diminished. Many employers are using a Retiree-Only Health Reimbursement Arrangement (HRA) or Special Pay Plan instead.

Retiree-Only HRA

Instead of issuing a check, employers can deposit payments for unused sick leave, severance, retiree buy-outs, or incentives directly into an HRA at retirement. This strategy offers a dual advantage – a tax-free investment for both employers and participants. Initially secured in a fixed account, these funds come with flexible plan options, empowering retirees to cover eligible medical expenses, including premiums. This innovative approach not only enhances the value of the benefits but also paves the way for an earlier, financially secure retirement.

Special Pay Plan 403(b)/401(a)

Instead of issuing a check, employers can deposit payments for unused sick leave, severance, retiree buy-outs, or incentives directly into a 403(b) or 401(a) account at retirement. These funds are versatile, allowing for rollovers and use for any purpose. With tax-exempt contributions for both employers and participants, and tax-deferred growth, this plan not only makes early retirement more attainable but also ensures the benefits continue to grow over time.