There have been several recent important retirement and employee benefit developments with significant tax ramifications that can potentially affect many taxpayers. The following is a summary of some of the more important developments in this area with a brief discussion of their impact on taxpayers affected by these developments.
1. Recent U.S. Supreme Court Decision on Inherited IRAs indicates need to review beneficiary designations
On June 12, the U.S. Supreme Court unanimously ruled in Clark v. Rameker, that funds held in an inherited IRA are not "retirement funds" within the meaning of the U.S. Bankruptcy Code and therefore are not protected from claims of creditors in bankruptcy. In general, an inherited IRA is any IRA that passes upon the death of the IRA owner to a designated beneficiary other than the surviving spouse of the decedent.
This court decision should be taken into account when selecting IRA beneficiaries. IRA owners can avoid the harsh results of this decision by naming their spouse as the designated beneficiary. If the IRA owner is not married or prefers to designate a beneficiary other than their spouse, the IRA owner should consider naming a trust as a beneficiary if bankruptcy protection is important for the beneficiary due to possible financial concerns. That individual could then be named as beneficiary of the trust without jeopardizing the IRA funds in case of bankruptcy.
It should be noted, however, that seven states including Texas have enacted state statutes exempting inherited IRAs in bankruptcy. Since the Clark v. Rameker case involved an individual residing in Wisconsin which is not one of the states exempting inherited IRAs in bankruptcy, the Supreme Court did not opine on whether its holding would have been different had the individual resided in one of these states. Therefore, Texas residents should seek the advice of legal counsel regarding designations for beneficiaries with possible financial concerns and any other questions regarding the Texas state statutes in this area.
2. IRAs and Qualified Retirement Plans may offer "Qualified Longevity Annuity Contracts" to participants
The IRS published final regulations effective July 2 which are intended to make it easier for IRAs and tax-qualified defined contribution plans, including 401(k) plans, to offer lifetime income payment options to participants. These new rules will ensure a stream of regular income throughout retirees' advanced years. These lifetime income payment options are referred to in the regulations as "Qualifying Longevity Annuity Contracts" ("QLACs"). This guidance will allow plan sponsors to offer solutions to participants concerned about outliving their retirement funds. The regulations accomplish this by allowing the plan to purchase a QLAC with a portion of participants' account balances without the amount being included in the calculation of the participant's Required Minimum Distribution. Generally individuals must start to receive distributions of the entire interest in their retirement accounts on April 1 following the year they reach age 70 1/2. In contrast, a QLAC does not need to begin benefit payments until the individual reaches an advanced age of no later than age 85.
In order to be a QLAC, the annuity contract must be purchased from an insurance company and specify that it is intended to be a QLAC. The contract must also meet certain requirements in addition to the distribution start date of no later than age 85 noted above. The amount of the premiums paid for the contract must not exceed the lesser of $125,000 (to be adjusted for inflation) or 25% of the participant's account on the date of payment. The contract must provide for fixed monthly payments (adjusted for annuity dividends). Death benefits must be paid in the form of a single life annuity (or in certain cases may provide for a return-of-premium feature in place of an annuity.) In addition, the annuity contract cannot include certain features such as accelerated payment of future benefits or cash surrender rights.
3. IRS announces 2015 inflation adjustments for Health Savings Accounts ("HSAs")
The IRS has provided the annual inflation-adjusted contribution, deductible, and out-of-pocket expenses limits for 2015 for HSAs. Eligible individuals may, subject to statutory limits, make deductible contributions to an HSA. Employer contributions on behalf of eligible individuals are generally excludable from income. In general, a person is an eligible individual if covered under a high deductible health plan ("HDHP") and is not covered under any other health plan that is not a HDHP, subject to certain exceptions.
The table below summarizes the 2014 HSA limits as compared with the HSA limits scheduled to go into effect in 2015:
2014-2015 HEALTH SAVINGS ACCOUNT ANNUAL LIMITATION COMPARISONS
(Per Rev. Proc. 2014-30 issued on April 23, 2014)
Description of Annual Limitation
Self-Only Not Less than Deductible Limitation
Self-Only Annual Not Greater than Out-of-Pocket Limitation
Self-Only Tax Deduction Limitation
$3,300 ($4,300 if eligible individual is age 55 or older)
$3,350 ($4,350 if eligible individual age 55 or older)
Family Not Less Than Deductible Limitation
Family Annual Not Greater than Out-of-Pocket Limitation
Family Tax Deduction Limitation
$6,550 ($7,550 if eligible
individual is age 55 or older
$6,650 ($7,650 if eligible individual is age 55 or older)
4. Employer's reimbursement of employees' health insurance premiums for coverage acquired on their own could result in costly penalties under the Affordable Care Act
The IRS recently posted Questions and Answers on its website that warn employers of costly consequences to an employer that doesn't establish a health insurance plan for its employees, but reimburses them for premiums they pay for health insurance acquired either through a qualified health plan in the health insurance exchange or outside of the exchange. According to the position taken by the IRS in Notice 2013-54, these arrangements, which are called employer payment plans, are considered to be group health plans subject to the various market reforms required of group health plans under the Affordable Care Act. (An employer payment plan generally does not include an arrangement under which an employee may have an after-tax amount applied toward health coverage or take that amount in cash compensation.) These reforms include the prohibition on annual limits for essential health benefits and the requirement to provide certain preventive care without cost sharing. In Notice 2013-54, the IRS clarifies that such arrangements cannot be integrated with individual policies to satisfy the market reforms. Consequently, the IRS has stated that such an arrangement fails to satisfy the market reform requirements and the employer may be subject to a $100 per day excise tax under section 4980D of the Internal Revenue Code.
For additional information regarding this topic, please contact your local UHY Advisors’ professional.
Wednesday, April 24, 2019 | 7:30 AM – 9:30 AM EDT | The Hartford Club