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HSA
Insights: Terry's Corner
A
member of the HSAFinder advisory
board, J. Terence MacAvery is a
New York attorney and CPA with
29 years of tax service experience
working with clients in a wide
variety of industries. He was with
KPMG in NYC for 27 years, the last
16 years as Partner. For the past
two years he has been a Partner
with Hamilton & MacAvery CPAs,
also in NYC.
The IRS recently
issued more detailed guidance on a wide variety of matters
relating to HSA’s to supplement
earlier pronouncements. In Notice 2004-50, the IRS poses
88 specific questions to which it offers answers and addresses
matters related to Eligible Individuals, High Deductible
Health Plans (HDHPs), Preventive Care, Contributions, Distributions,
Comparability, Rollovers, Cafeteria Plans, Account Administration,
Trustees and Custodians and Other Issues. The guidance is
welcome and generally useful and reflects an apparent real
interest by the government in promoting this new program.
Of particular note are the following:
Q&A 2 makes
it clear that eligibility for HSA contributions continues
upon eligibility for Medicare where there has not
been actual enrolment in the program.
Q&A 16 excludes
payments beyond usual, customary and reasonable limits
that may be provided by a plan from out-of-pocket
maximum determination.
Q&A 36 clarifies
that distributions from an HSA for spouse or dependent
medical expenses are tax-free even if
those individuals are covered by a non-HDHP.
Q&A 39 permits
tax-free treatment for a distribution to pay medical expenses
incurred in a prior year provided
the expenses were incurred after establishment of the HSA.
Q&A 43 allows retirees 65 or older to pay medical insurance
premiums with tax-free HSA distributions. In a similar manner,
Q&A 45 allows the same treatment for distributions to
pay for Medicare premiums.
Q&A 81 I reproduce
in its entirety:
“Q-81. Are
employers who contribute to an employee's HSA responsible
for
determining whether the employee is an eligible individual
and the employee’s
maximum annual contribution limit?
A-81. Employers
are only responsible for determining the following with
respect to an employee’s eligibility
and maximum annual contribution limit on HSA contributions:
(1) whether the employee is covered under an HDHP (and the
deductible) or low deductible health plan or plans (including
health FSAs and HRAs) sponsored by that employer; and (2)
the employee's age (for catch-up contributions). The employer
may rely on the employee's representation as to his or her
date of birth.”
In addition to the foregoing notable particulars, there
is considerable useful guidance worth noting on various aspects
of integration with Cafeteria Plans under Section 125.
EARLIER UPDATES:
1.
IRS Requests Comments on Forms
Related to HSA’s
In
late June, the IRS has requested
comment on model documents for
trust or custodial agreements for
HSA’s. Form 5305-C, Health
Savings Custodial Account, and
Form 5305-B, Health Savings Trust
Account, have been released in
proposed form for comment before
the final forms are issued. The
forms are at www.irs.gov.
"We have received numerous requests from the public
for a safe-harbor document like this one. Many banks
and other prospective HSA trustees and custodians would
like to offer a product off the shelf and be certain
that the form of the trust or custodial agreement meets
the requirements under the Internal Revenue Code," said
Greg Jenner, Acting Assistant Secretary for Tax Policy. "We
look forward to hearing any comments that interested
parties may have and finalizing these documents for
use as soon as possible."
When
finalized, the forms, although
not required, are available for
those trustees and custodians
for their use.
2.
IRS Grants Permission for States
Denying High Deductible Plans
Some
states require health plans to
offer certain
benefits without regard to a deductible or
below the minimum deductible contemplated
for HSA’s
($1,000 for individuals or $2,000 for families).
In a notice dated 7/6/04, the IRS stated that for
months before 2006 such plans, if otherwise eligible,
will be eligible as HSA’s for tax purposes
if the otherwise disqualifying features were
required by stat law at 1/1/2004. In effect,
the affected
states have until the end of 2005 to amend
their law to conform to the requirements
of the tax law.
3.
Limits on Use of HSA’s
to Pay for Long-Term Care Insurance
Premiums?
HSA
distributions may be used to
pay for
long-term care Insurance premiums. Such
premiums qualify
as medical expenses for medical deduction
purposes subject
to certain annual limitations as to amount
depending on age. The enabling statutory
language in the
Internal Revenue Code for HSA’s is
not clear about whether similar limitations
apply for purposes of distributions
eligible for favorable treatment under
the HSA rules. Early indications from the
IRS are that such limitations
do apply. If so, this could lead to discouraging
payment of such premiums from HSA’s. |
