VEBA Plan: Employer-Funded Health Savings for Employees

The VEBA Plan Voluntary Employees’ Beneficiary Association Trust Minnesota Service Cooperatives April 2008

What is the VEBA Plan? A type of welfare benefit plan providing for individual, employer-funded accounts that may be used to reimburse participants for medical care expenses. VEBA TRUST Post-retirementsavings plan Funds available during employment

VEBA Plan Trustee A trustee is required for the Employer Benefits Trust Agreement. The trustee is typically a bank or financial institution.

VEBA Plan administrator • It is most beneficial if the administrator of the health plan and the VEBA account can work simultaneously with an automatic crossover feature. This makes the process seamless for the employee. • The VEBA Plan administrator will provide the following: • Process enrollment • Collect contributions • Process claims/issue reimbursements • Screen for 213(d) eligible expenses • Provide customer service

Why the VEBA Plan? • Rising costs of medical premiums • Members (group purchasers and employees) demanding a greater choice in health care options • Plan design engages member in health care decisions

Why the VEBA Plan? • Plan keeps pace with medical inflation • VEBA Plan encourages employees to move to a high-deductible health plan (HDHP) • Increases family participation

Why the VEBA Plan? • Reduce unnecessary utilization • Provide options for all employees • Provides retirement savings plan • Investment account options

The VEBA Plan • The VEBA Plan allows employees to use individual accounts to save for medical expenses. • The accounts are funded entirely with employer contributions. • Employees may use funds to pay for eligible medical, dental and insurance premiums.

The VEBA Plan • Account balances may be rolled over from year to year –no use it or lose it. • Account balances may accumulate over time, which will permit employees to save for health expenses in retirement. • Non-qualified distributions are not permitted.

Eligible participation • Participation in the VEBA Plan is limited to public employers. • Participation in the VEBA Plan will be determined pursuant to collective bargaining agreements and personnel policies of participating employers.

Eligible participation • Though one HDHP option is recommended, two or three plan choices are allowed (if required group size is met) for the VEBA Plan for active employees. Bargaining units may move to the new plan upon completing negotiations. Migration over multiple years is allowable. • Contributions under the VEBA may be limited to participants who elect coverage under the HDHP. • Individual employees may not opt in or out of the VEBA Plan. Eligibility is determined by a collective bargaining agreement or personnel policies for class of employees.

Funding the VEBA Plan • The account is funded with employer contributions pursuant to collective bargaining agreements or personnel policies. • Contributions may vary by bargaining unit • At retirement, the VEBA Plan account may also be funded with all or a portion of sick, vacation and severance pay, if provided for in the collective bargaining agreement or personnel policy.

Funding the VEBA Plan • There is no annual or lifetime contribution limit. • Employees may not contribute to the VEBA Plan.

Eligible VEBA Plan expenses • All eligible health care expenses • Section 213(d) of the Internal Revenue Code • Dental and vision care • Insurance premiums • Continuation • Medicare Supplement • Individual

Eligible VEBA Plan expenses • An employee who terminates employment and is covered under a VEBA Plan may draw down the balance of the account for reimbursement of eligible medical expenses, including: • Individual health care premiums • Dental and vision care • Continuation • Medicare Supplement premiums

Ineligible VEBA Plan expenses • Cosmetic surgery • Electrolysis • Health club dues • Teeth bleaching • And more — refer to the IRS list

IRS Regulations • Unused monies carry over from year to year • Withdrawals only for qualified expenses • Employer contributions are subject to non-discrimination rules under Section 105 of the tax code. However, there is no dollar limit or ceiling.

IRS Regulations • “Cash out” not allowed: • Upon participant’s death, the account balance is available to reimburse medical expenses of surviving spouse and tax-eligible dependents. • After the participant’s death, the beneficiary may be reimbursed (tax-free) for medical expenses. • The value of this benefit is taxable to the participant (now deceased). • Taxes are withheld and paid from the account.

Selling points & advantages — employer • The VEBA Plan trust is irrevocable • FICA savings on contributions • Employer contributions are excluded from employee taxable income • One plan, reduced administration cost for those groups withtotal replacement

Selling points & advantages — employer • Elimination of anti-selection for total replacement groups • Annual indexing of deductible and out-of-pocket limits will keep pace with inflation • Provide employers with a solution to balance costs with expectations • Allow members to use discretionary dollars for services that are most important to them

Selling points & advantages — employee • The VEBA Plan provides robust investment options • Rollover of unused dollars from year to year • Tax-exempt withdrawals for qualified medical expenses not covered by the plan for Section 213(d) expenses • Tax-exempt withdrawals to pay insurance premiums such as continuation, individual and Medicare Supplement

Selling points & advantages — employee • Automatic crossover feature • Member control of dollars, discretionary savings fund,first-dollar interest • Interest and earnings grow tax-free • Member choice of available services • Distributions to participants for medical expenses areexcluded from gross income • No “use-it-or-lose-it” provision

Blue Cross and Blue Shield of Minnesota member support services • 24-hour nurse advice line • Mail order pharmacy benefit • Complementary care provider network • Discounts on herbal supplements and vitamins

Member support tools • myBlueCross online member center at www.bluecrossmn.com/mnservcoop • Receive e-mails and letters specific to health concerns of interest • Research health conditions • Health assessment and online coaching modules • Calculators for weight and body fat management • Appointment reminders • Quizzes, polls and on-line shopping • Tobacco reduction program

Member support tools • Prescription drug cost calculator • Physician and hospital cost and quality data • E-mail questions to customer service • Link to SelectAccountSM to check account transactions and balances • Investment education MII Life Inc., d.b.a. SelectAccount, an independent company providing account administration services

VEBA Plan options

Plan options • Minnesota Provider Network • Deductibles range from $600 to $2,600 per person and$1,200 to $5,200 per family • In-network coinsurance ranges from 0 to 30 percent • All plans include a preventive care benefit

Plan options • $5 million lifetime maximum • Calendar-year or plan-year deductible • Automatic crossover feature for health care and pharmacy expenses

What are the plan options? *This is only a very general outline of plan benefits. The Summary Plan Description includes complete details of what is and is not covered. ** This chart reflects 2008 benefits. Deductible amounts and out-of-pocket maximums may increase annually to keep pace with inflation. NOTE: There are two alternative prescription drug benefit designs below, available for integration into each of the above plans. Inclusion of either plan B or C below will NOT allow automatic claims reimbursement (i.e. “crossover”) with respect to prescription drug benefits. Please discuss these drug plans with your representative. •Plan B – Greater of a $14 or 25% copay up to a $750 individual/$1,000 family out-of-pocket. •Plan C – 25% coinsurance up to a $750 individual/$1,000 family out-of-pocket.

Employer contribution strategy • Percent of premium for single and family is most advantageous • Full single and partial family premium contribution does not fund family VEBA adequately

Appropriate funding is key • 80/20 rule; typically 20 percent of members incur 80 percent of claims • Employer contributions to the VEBA need to encouragefamily participation • Multiple plan offerings is not recommended – eliminatesanti-selection and underfunding of the plan.

Recommended rules • One plan offering per group • No cash in lieu of plan • Employer contribution will remain as negotiated • All eligible employees must enroll unless they have an eligible waiver for other group coverage • Deductible and out-of-pocket levels will increase annually to keep pace with inflation

VEBA multiple option • VEBA will be most successful on a total replacement basis • Total replacement lessens the opportunity for anti-selection • Simplifies enrollment • No discrimination concerns

VEBA multiple option The number of options allowed by group size are as follows: • 2-14 One benefit plan offering • 15-50 May have up to two benefit plan offerings – minimum of five contracts in each benefit plan • 51-99 May have up to two benefit plan offerings – minimum of ten contracts in each benefit plan • 100+ May have up to three benefit plan offerings – minimum of 10 contracts in each benefit plan

Conclusion • The VEBA Plan can provide a variety of benefits, including life and death benefits, sickness, accident and other benefits related to the welfare of employees, their dependents and beneficiaries. Benefit payments are not based on the passage of time, but rather are triggered by a specific event. • The VEBA Plan is a way to reduce tax liability, provide employee benefits and protect assets from personal and business creditors. • The VEBA Plan can engage the member in making informed health care decisions.

Conclusion • Raise awareness of the cost of services versus the benefit value. • Allow physician choice and strengthen the patient/physician relationship. • Provide employers with a solution to balance costs with expectations. • Allow members to use discretionary dollars for services thatare most important to them.

Towers Perrin overview The proposed VEBA Plans: • May help keep pace with inflation • Provide incentives for unions to move to plans with morecost sharing • Provide a viable option for all bargaining units • Increase family participation • Reduce unnecessary utilization • Reduce the level of future premium increases for total replacement groups The above can only be accomplished if the rules are followed.

VEBA active & retiree trust administrator: SelectAccount

SelectAccount • Introduction • What it means to be an administrator • Process enrollment • Collect contributions • Process claims/issue reimbursements • Screen for 213(d) eligibility • Customer service • Reporting • Employee welcome kit • Quarterly statement • Explanation of claims payment

SelectAccount administrator advantages • Claim processing • Daily processing • Pending claims

SelectAccount administrator advantages 24/7 access to your account • www.selectaccount.com/veba • Access to forms • Access to individual account status • Access to investment account information and setup • IVR – Interactive Voice Response system • Access to account information

SelectAccount administrator advantages • Direct deposit option • Seamless claim payment from the account: Crossover option • Medical • Pharmacy • One of the top 10 account administrators in the nation • Over $108 million in deposits and mutual fund assets under management • Excellent customer service for groups and members • High-rated investment options: 15 mutual funds selected by Devenir Investment Advisors LLC

Medical claims processing(with crossover) • Eligible expenses are applied to the deductible • 213(d) eligible expenses are covered • If crossover is elected, claims are automatically forwarded to SelectAccount for reimbursement • VEBA dollars are paid to the member • Member reimburses the provider

VEBA and FSA • SelectAccount can administer both VEBA and flexible spending accounts (FSAs) • FSA is primary • Single election for crossover

SelectAccount fees MII Pricing 1Basic Investment Account – Account invested in a diversified family of 15 mutual funds selected for SelectAccount by Devenir Investment Advisors LLC. 2Base Balance Funds – this refers to the dollars in the VEBA account. Participants must maintain a minimum balance of $1,000 in the Base Balance in order to direct money to the Basic Investment account. 3Basic Investment Account Service Fee – This fee will be deducted from the participant’s Basic Investment Account balance. Zero balance investment accounts will not be charged a fee. 4Account Crediting Rates – The interest crediting rate is subject to change at any time without notice.

Questions • For questions regarding the health plan call your local Service Cooperative or your Blue Cross and Blue Shield of Minnesota sales representative. • For questions regarding the trust account for the VEBA: Call SelectAccount at (651) 662-5065 or 1-800-859-2144 Monday through Friday, 7 a.m. to 7 p.m.

VEBA Plan: Employer-Funded Health Savings for Employees