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September 9, 2014

ATTENTION:    Personnel and Payroll Officers
SUBJECT:    July 2014 Retiree Health Fund Contribution
SUBJECT:    Retiree Health Fund Contribution Audit


The SEBAC 2009 Agreement required new hires and employees with fewer than five years of service as of July 2010 to contribute 3% of compensation to the Retiree Health Fund until they completed 10 years of state service. The payroll deduction code OPEB implemented the 3% contribution for employees in this group. The 3% deduction amount for short-tenured employees and new hires was not affected by the SEBAC 2011 Agreement.

The SEBAC 2011 Agreement extended the requirement to contribute to the Retiree Health Fund to all employees and called for all employees to make contributions for 10 years or until date of retirement, whichever comes first. Under SEBAC 2011, contributions for longer-tenured employees were phased in over a three-year period, with a 0.5% contribution rate in FY 2014, a 2% contribution rate in FY 2015, and 3% in FY2016. The payroll deduction code OPE2 was used for the phased-in Retiree Health Fund contributions for members of the State Employees Retirement System (SERS) and the Alternate Retirement Program.

Beginning in 2011, Teachers Retirement System members had their Retiree Health Fund contributions offset by mandatory contributions they pay to TRS for retiree health benefits. For TRS members who began contributing to the Retiree Health Fund in 2010 the contribution amount was reduced to 1.75% in October 2011 and was assigned a new payroll deduction code OTRS. For TRS members who were first required to make contributions under the SEBAC 2011 Agreement, the payroll deduction code OTR2 implemented phased in contribution rates of 0% in FY 2014, 0.75% in FY 2015, and 1.75% in FY 2016.


It is the hiring agency's responsibility to ensure that each new or rehired employee is signed up for the correct Retiree Health Fund deduction unless they are specifically exempted - by reason of employment status or eligibility for alternate retiree coverage. The Retiree Health Fund contribution is directly tied to obtaining service credit for purposes of retiree health benefit eligibility. Commencement of retiree healthcare benefits may be conditioned upon a member's payment of any Retiree Health Fund amounts owed at the time of retirement.

A. Recent Audit Results

The Comptroller's Office recently conducted an audit of Retiree Health Fund enrollment of employees hired on or after July 1, 2011. The audit revealed numerous enrollment errors, the most common of which were:

  1. New employees were not enrolled for the OPEB (3%) deduction code with their first paycheck;
  2. New employees were improperly assigned the OPE2 (0.05%) deduction code, for which they were not eligible;
  3. Staff improperly categorized healthcare-eligible employees as ?temporary? workers for purpose of exempting them from OPEB contributions;
  4. New state employee members of TRS were improperly assigned the OTR2 deduction code for which they were not eligible; and
  5. Employees who were subject to a waiting period before starting health benefits did not have required the Retiree Health Fund deduction start when their healthcare coverage began.

These delays and errors resulted in substantial underpayment of required Retiree Health Fund contributions, which will affect the accrual of service credit for retiree health benefit eligibility for these employees, and must be corrected.

B. Enrollment Error Correction Process

The Comptroller's Office has begun notifying the responsible agencies about the contribution deficits for employees. Each affected employee should be enrolled for the correct Retiree Health Fund deduction immediately. Employees have two choices to rectify the contribution shortfall. The amount and duration of their Retiree Health Fund contributions will be affected by the option chosen.

Employees can either: (1) make up the deficiency by paying missed or insufficient contributions from future paychecks and retain service credit for purposes of retiree healthcare eligibility; or (2) extend the time period for making required Retiree Health Fund contributions by the duration of the missed or insufficient contributions and forfeit credit for healthcare-eligible service during that period. The details of each option are explained below.

1. Repayment Option

Under this option the employee agrees to repay missed and/or insufficient contributions. The amount to be repaid is based on compensation earned during the period when contributions should have been made less amounts paid under an incorrect deduction code. The deficiency can be repaid in a lump sum or by payroll deduction.

To repay missed deductions an employee should fill out Form CO-1328 to specify the repayment plan. If the employee chooses payroll deduction, the repayment period should be at least the number of pay periods during which Retiree Health Fund contributions were either missed and/or insufficient. Longer repayment periods must be reviewed by the Office of the State Comptroller to ensure that payroll deduction amounts will be sufficient to satisfy the employee's outstanding liability by time his or her Retiree Health Fund contributions end.

Under this option, the end date for the employee's Retiree Health Fund deduction will include time during which the contributions should have been made, and the employee's healthcare-eligible service during that period will count as "actual state service" for purposes of future retiree healthcare eligibility.

For example, Employee A was hired 9/7/2012 and should have had the OPEB (3%) deduction start with his first pay period, but the agency failed to put it in place. On 7/12/2013, he was auto-enrolled for the OPE2 deduction code, for which he was not eligible. His agency enrolled him for the correct OPEB deduction in August 2014. His required OPEB contributions were $3,415, and, after deducting the $280 he paid under the OPE2 deduction code, his deficiency is $3,135.

If Employee A had been properly enrolled when hired, the end date for his OPEB deductions would have been 9/7/2022. Because Employee A elects to repay the $3,135 deficiency by payroll deduction, he will have an end date of 9/07/2022 for his OPEB deduction and will retain credit for the 23 months of healthcare-eligible service that he accrued when his correct Retiree Health Fund contributions began.

To implement the repayment option, the agency will enter the total amount due on the Form CO-1328, whether the amount will be repaid in a lump sum or by payroll deduction, and enter the payment start and stop dates using the ADJOPE deduction code. Payments under the ADJOPE deduction code will be in addition to regular Retiree Health Fund contributions under the OPEB or OTRS deduction codes.

2. Extension Option

Employees are also permitted to extend their Retiree Health Fund contributions by the period of time during which they made no contributions or insufficient contributions under the wrong deduction code. An employee who chooses this option will receive a refund of incorrectly coded contributions but will forfeit credit for the equivalent period of  "actual state service" for purposes of retiree healthcare eligibility. Under this option, an employee's Retiree Health Fund contributions will end 10 years from the effective date of the correct deduction code. Retiree Health Fund deductions will be calculated based on future compensation, and as a result of anticipated pay increases may result in payment of higher total contributions than would be the case under Option 1.

For example, Employee B started with the state on 6/28/2012 but did not become eligible for active health benefits until 12/28/2012. She made no Retiree Health Fund contributions until she was auto-enrolled for the OPE2 deduction (for which she was not eligible) in July 2013. Her agency was notified of the error and entered the correct OPEB deduction code in August 2014. As of that date she had 19 months of healthcare-eligible service. Her contributions should have been $3,478, after deduction of the $359 paid under the OPE2 deduction, she owes $3,119.

Employee B elects to extend the end date for her Retiree Health Fund contribution until August 2024, and get a $359 refund. For purposes of retiree health benefit eligibility she will lose ?actual state service? credit for 19 months of healthcare-eligible service accrued prior to August 2014.

To exercise this option, the employee fills out Form CO-1329 and the agency provides the necessary information to calculate the service credit to be forfeited. All refunds and service forfeiture calculations will be verified and processed by the Healthcare Policy & Benefit Services Division, Employee Benefits Unit.

3. Deadline for Taking Action (Default)

Each affected employee should be given no more than sixty days make a decision on how they wish to address missed or insufficient contributions. If no action is taken in that time, it will be assumed that the employee has elected to extend the end date for his or her Retiree Health Fund contributions. In that case the agency should fill out the CO-1329, indicating the refund amount and calculate the duration of the employee's healthcare-eligible service during which required Retiree Health Fund contributions were not paid. This will cause the employee to forfeit such service for purposes of future retiree health benefit eligibility and require contributions to be made for 10 years.

4. Refunds upon Separation from State Service

An employee who leaves state service without qualifying for future retiree health coverage is entitled to request a refund of Retiree Health Fund contributions unless such employee is applying or intends to apply for disability retirement benefits. Employees leaving state service after qualifying for retiree health coverage are not eligible for a refund.


Agency Payroll and Human Resources personnel with questions regarding this process should e-mail  or telephone 860-702-3570.

Very truly yours,

Division Director

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