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HSAs and what you need to know about them!

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By Mack Bekeza

Since 2003, Health Savings Accounts (“HSAs”) have been an excellent tool for families to help cover current healthcare costs, along with future healthcare costs. HSAs are also known to be an excellent tax-planning tool since participants are allowed to contribute on a pre-tax basis and the funds grow tax deferred. Additionally, participants are able to make tax-free withdrawals for qualified medical expenses. Funds in an HSA may also be invested in a list of mutual funds, or even have a brokerage link for more savvy investors. On top of that, people have until April of the following year to make contributions (similar to an IRA).

With all of these excellent benefits, there are a few caveats:

  • There is a yearly contribution limit of $3,400 per year for individuals and $6,750 for family plans in 2017. If your health plan runs from January to September, you can only make contributions for these months.
  • There can be tax penalties if withdrawals are made for non-qualified medical expenses before age 65. This involves paying income taxes for the non-qualified withdrawals as well as a whopping 20% penalty.
  • In order to qualify to contribute to an HSA, individuals must have a high-deductible health care plan (“HDHP”). This means that an individual plan must have a minimum deducible of $1,300 and minimum “maximum out-of-pocket costs” of $6,550 for 2017. For family plans, the minimum deductibles and maximum out of pocket costs would be $2,600 and $13,100 respectively. You also cannot be enrolled in Medicare.
  • Finally, if you are currently enrolled in a health plan that is a part of a healthcare.gov exchange, finding a health plan that is HSA eligible for 2017 will be nearly impossible since the requirements for a health plan to be eligible for a government exchange go against the requirements for a plan to be HSA eligible.

These setbacks should not prevent people from taking advantage of these accounts. In fact, HSAs will more than likely save people money in the long term and even in the short term. With having a HDHP, premiums will be notably less expensive for individuals and families, meaning that people can use those up front savings towards HSA contributions. Also, people can reimburse themselves for medical expenses that occurred in the past as long as the HSA was opened before that expense occurred. This means that if someone needed to make a non-qualified distribution, he or she can make it appear as if they were reimbursing themselves for a prior medical expense.

Although you will have to increase your deductible and maximum-out of pocket costs, utilizing a Health Savings Account could be one of the best decisions you will make if you want to plan for future health needs, even in retirement. And, don’t forget to keep your medical receipts…you may need them later!

© 2016 Castle Rock Investment Company. All rights reserved. Please share your insights with us at mack@castlerockinvesting.com or via phone at 303-719-7523

In-plan Roth Rollovers: the latest topic

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Get out your red pen, folks: serious revisions to the rollover options for your plan. Today we’re looking at how you will need to revise your Plan Document in order to offer in-plan Roth rollovers and a few highlights.

In-plan Roth rollovers of otherwise non-distributable amounts are treated as eligible rollovers, meaning that no withholding applies. Since this amount is not distributable, no part of the rollover may be withheld for voluntary withholding. An employee making an in-plan Roth rollover may need to increase his or her withholding or make estimated tax payments to avoid an underpayment penalty. Concerning the rollover process, here is a critical section to know from IRS Notice 2014-74:

 

If you do a rollover to a designated Roth account in the Plan

You cannot roll over a distribution to a designated Roth account in another employer’s plan. However, you can roll the distribution over into a designated Roth account in the distributing Plan. If you roll over a payment from the Plan to a designated Roth account in the Plan, the amount of the payment rolled over (reduced by any after-tax amounts directly rolled over) will be taxed. However, the 10% additional tax on early distributions will not apply (unless you take the amount rolled over out of the designated Roth account within the 5-year period that begins on January 1 of the year of the rollover).

If you roll over the payment to a designated Roth account in the Plan, later payments from the designated Roth account that are qualified distributions will not be taxed (including earnings after the rollover)…

Remember, if you’re making revisions to your Plan Document, then Best Practices direct you to get an ERISA attorney, and make sure you’re fulfilling your fiduciary responsibility.

 

Katherine Brown is a Research Associate at Castle Rock Investment Company with a Master’s degree in Global Finance, Trade, and Economic Integration from the University of Denver. She can be reached at Katherine@castlerockinvesting.com.

401(k) Questionnaire Project

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Back in May of 2010 the IRS sent letters to 1,200 401(k) plan sponsors instructing them to complete the 401(k) Questionnaireonline by visiting a secure website and using a PIN number provided in the cover letter.     Their stated intention is to:

  • better understand 401(k) plan compliance issues,
  • determine how their tools and voluntary compliance programs are working, and
  • identify participant awareness and plan sponsor compliance issues

The IRS wants to “encourage all plan sponsors to use the Questionnaire as an internal control tool to review your plan and determine if it is in compliance.

They also announced that “Non-reponders” will be subjected to a full-scope examination to provide the data needed for their 401(k) market segment analysis.

If your plan is a 401(k) I encourage you to review the questionnaire and highlight the areas of uncertainty that should be addressed.  If you need assistance please feel free to contact me.

In-Plan Roth Rollovers

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On November 26th, 2010, the IRS provided guidance relating to rollovers from 401(k) plans to designated Roth accounts in the same plan (“in-plan Roth rollovers”).  They used a Q&A format (20 questions) and below is a summary of three key questions.

Q-2.  What amounts are eligible for in-plan Roth rollovers?

A-2.  An amount is not eligible for an in-plan Roth rollover unless it satisfies the rules for distribution under the Code and is an eligible rollover distribution…Thus, in the case of a § 401(k) plan participant who has not had a severance from employment, an in-plan Roth rollover from the participant’s pre-tax elective deferral account is permitted to be made only if the participant has reached age 59 ½, has died or become disabled, or receives a qualified reservist distribution.

Q-8.  Are in-plan Roth direct rollovers subject to 20% mandatory withholding?

A-8.  No…However, a participant electing an in-plan Roth rollover may have to increase his or her withholding or make estimated tax payments to avoid an underpayment penalty.

Q-15.  Is a plan amendment providing for in-plan Roth rollovers in a § 401(k) plan required to be adopted by the end of the 2010 plan year?

A-15.  No…to give plan sponsors sufficient time to adopt plan amendments and thereby enable plan participants to make in-plan Roth rollovers before the end of the 2010 plan year, the Service is extending the deadline for adopting a plan amendment…to the later of the last day of the plan year in which the amendment is effective or December 31, 2011, provided that the amendment is effective as of the date the plan first operates in accordance with the amendment.

Please speak with your third party administrator and ERISA counsel if you would like to adopt this provision for 2010.

New IRS Initiative Targets 401(k) Plan Compliance

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by Ed Frado, J.D.

IRS recently announced that, starting in March, it would begin sending questionnaires to “a random sample of 401(k) plan sponsors” for a new initiative to gauge the “health of these plans.”  As background, the IRS provides on its website several tools (e.g., a “401(k) Fix-It Guide”) intended to encourage plan sponsors to conduct periodic reviews of their plans and to self-correct documentary or operational compliance issues discovered in those reviews.  Top IRS officials have stressed over the past couple of years that it will be a lot less expensive if plan sponsors find errors and self-correct them than having the IRS discover those errors during a plan examination.

In announcing this new initiative, the IRS stated that the questionnaire will elicit information that will help the IRS to determine if the tools referenced above are being used and are working.  Overall, the IRS noted that it drafted the questionnaire to help the IRS “better understand compliance behaviors.”

What will the IRS do with the questionnaire answers?  The IRS stated that it will prepare a report of findings and publish that on its website, as well as update its website materials “to better serve the needs of the plan sponsors.”  However, even a small amount of cynicism could lead to the thought that the IRS may eventually use the questionnaire responses as a way to target plans for an examination.

In any event, plan sponsors that receive a questionnaire under this initiative should consider discussing it with the plan’s service provider and having the responses reviewed before submitting the completed questionnaire to the IRS.  Also, this serves as yet another reminder that plan sponsors should conduct periodic reviews that are distinct from the plan’s annual ERISA audit and self-correct any discovered compliance issues.

Ed Frado is an employee benefits attorney who has specialized exclusively in this field for more than 11 years.  At Denver Compensation & Benefits, LLC, he advises clients in a wide array of employee benefits issues.  Also, Ed is a frequent speaker at seminars,  conferences, and accounting firms’ in-house training for employee benefits auditors.  You can reach Ed at edfrado@denverbenefits.com.