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What: Some municipalities with the MERS Health Care Savings Program may be inaccurately administering the leave conversion provision of their plan

Action Required: Potentially

Key Dates: It is recommended that municipalities inaccurately administering this provision correct their actions immediately to avoid IRS-accessed penalties.

Impacted Audiences: Municipalities with a MERS Health Care Savings Program

For More Information: Your MERS Benefit Plan Coordinator – 800.767.6377

Key Information:

As your partner in retirement, we want to ensure your Health Care Savings Program (HCSP) plan is in compliance with IRS guidelines.

Upon adoption of HCSP, you may have elected to offer a mandatory leave conversion provision for one or more division(s). Leave conversions are all or a portion of unused leave payouts that are contributed annually or at separation of employment.

In order for your plan to maintain its tax-qualified status, contributions must be mandatory. Employees cannot choose how they receive their leave conversion. However, each division may define its own payout option.

If you are currently offering a lump sum amount for leave conversions as an optional benefit to your employees, it is recommended that you immediately stop. Administering your plan in this manner violates the tax-free nature of the program and may require those contributions to be taxable income reported on an individual’s W-2 form. If you are seeking a flexible option that allows your employees to choose how they receive leave conversions, consider amending your HCSP agreement and utilizing the MERS 457 Program.

Resources available: Click here for the HCSP Employer Guide

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