Gary Lesser

Family Coverage Won't Disqualify Spouse From HSA, IRS Rules A married individual who is eligible to contribute to a health savings account (HSA) does not lose eligibility when his or her spouse has low-deductible family health coverage, provided the spouse's plan does not cover the individual, the IRS ruled on April 13. According to Rev. Rul. 2005-25, the special rule in the Internal Revenue Code treating both spouses as having only family coverage when either one has family coverage does not apply when the other spouse's low-deductible coverage excludes his or her spouse. It also does not affect the eligible spouse's eligibility to make HSA contributions up to his or her annual contribution limit. The maximum amount that an eligible individual may contribute to an HSA is based on whether the individual has self-only or family high-deductible health plan (HDHP) coverage, the IRS said. For 2005, the contribution limit is the lesser of the annual deductible under the HDHP (minimum of $1,000 for self-only coverage and $2,000 for family coverage) or $2,650 for self-only coverage and $5,250 for family coverage. A married individual who is eligible to contribute to a health savings account (HSA) does not lose eligibility when his or her spouse has low-deductible family health coverage, provided the spouse's plan does not cover the individual, the IRS ruled on April 13. According to Rev. Rul. 2005-25, the special rule in the Internal Revenue Code treating both spouses as having only family coverage when either one has family coverage does not apply when the other spouse's low-deductible coverage excludes his or her spouse. It also does not affect the eligible spouse's eligibility to make HSA contributions up to his or her annual contribution limit. The maximum amount that an eligible individual may contribute to an HSA is based on whether the individual has self-only or family high-deductible health plan (HDHP) coverage, the IRS said. For 2005, the contribution limit is the lesser of the annual deductible under the HDHP (minimum of $1,000 for self-only coverage and $2,000 for family coverage) or $2,650 for self-only coverage and $5,250 for family coverage. Rev. Rul. 2005-25 is available online at

It is too late to establish a SIMPLE plan for 2004. OTOH, a SEP can be established on or before the due date (generally, April 15) of the business's tax return for 2004. If contributing 25 percent under a model or non-integrated prototype SEP, the owner's SEP contribution would be 20 percent [.25/1.25] of his or her net profits from SE [shown on "bottom line" of pre-plan Schedule C] after first deducting (a) any employee contributions made to the plan, and 1/2 of the self-employment tax deduction. After all reductions, the compensation limit is applied ($205,000 for 2004; $210,000 for 2005). If the plan is integrated, this approach (the "equivalency method") does not work. Spreadsheet analysis/software is generally used in these situations.

Although it may have serious side effects (e.g, if there is a divorce or determining basis if death occurs, and it will), they may be able to have their stock treated as separate property. You need to get a copy of Derrin Watson's Book, Who's the Employer?--see chapter 7 (especially Q 7:17). Derrin's Book

If I understand correctly, the 2005 W-2's can be fixed by adding the January deferrals to taxable income and withholding taxes on those amounts. Yes, but the matching contributions are also treated as income. The January deferrals + earning must then be withdrawn, but the holder of the assets (Vanguard in my case) will issue a 1099-R. Can they use code "8" and show zero as taxable amount? They will generally do what they do. It would be helpful to include any notice the employer provides to the trustee or custodian. The employee can explain that the amount (but not gain) was included in income per the W-2 (if it is reported as taxable). If reported as subject to penalty, that too can be explained away. What happens to the match? Can that be returned to the employer with earnings? If so, should 1099-R's be issued to participants for the match amounts with code "8" and zero as taxable amount? It belongs to the participant now. No returning to employer. If the employer's letter clearly states that the amount was included on the W-2 the trustee may (or may not) code it as "not determined" (box 2B)). You indicate, Gary, that the remaining SIMPLE assets can be rolled to an IRA and then into the 401(k) plan (it does accept rollovers). Is there a reason why they can't be directly rolled to the 401(k) plan, assuming the 2-year rule is satisfied? The devil is in the details and there seem to be a lot of details to take care of in undoing this January contribution. I appreciate any guidance you can give me. Well, as things evolved, SIMPLE IRAs don't become traditional IRAs after two years. Rollovers from SIMPLE IRAs to a QP/403(b)/457(f)--but NOT a SIMPLE 401(k)--are permitted after 2 years. Within the two year period, the SIMPLE IRA can only be transferred into another SIMPLE IRA (see 408(d)(3)(H), as amended by EGTRRA).

With the election in place before year end, the contribution is due before the due date of the return, but should be made sooner if the EI is capable of being determined any sooner. See, e.g., Treas. Reg. Secs 1.401(k)-2(a)(4)(ii) and 1.401(k)-1(a)(6)(ii)(B).

An employer who has 3 classes of union employees runs a SIMPLE plan for their non-union employees. Including ALL unionized employees, how many employee's are we talking about (this year, last year--that wd be eligible)? Can the employer elect to include in their SIMPLE plan the union employees who are only covered under the national contributory DB plan? Possibly. An individually designed SIMPLE plan would probably be needed. It could be approved by IRS in a Priv. Ltr. Ruling request. If so, would the portion of compensation that is held out of their paycheck for the db plan be used in calculating the overall deferral limit of $14,000? This would depend whether the "db" payment is an elective contribution under IRC 402(g) or some other mandatory payment that just happens to reduce gross income. Is the limit actually $10,000 due to the SIMPLE limits? NO Is it $10,000 minus their contribution to the db plan? See above. If all contributions are 402(g) elective contributions, then the annual limit can not be exceeded in the aggregate. What's defered by the participant in the SIMPLE certainly eats up the annual limit. You may need to explain in more detail what the "db" contribution is all about.

Definately. The executor/rix can make the contribution on behalf of the sole-proprietorship. If there were employee's that participated the sole-proprietorship could make a contribution to employees, in which case an eligible owner with EI--although dead--would have to receive a SEP contribution, if any are made. The terms of a QP would determine whether it would have to allocate any contributions to the SE individual.

GBurns - - SEP yes, but not a SARSEP. See IRC 408(k)(6)(E) regarding govies and TE organizations. State enabling statutes, if applicable, must permit adoption. jstorch - - Regarding the modified definition of compensation. I'd get a PLR. A demonstration that such definition is not discriminatory will probably be requested if not includied in the submission. Is it discriminatory (why else would it be done)? Can you find a statutory exclusion for such payments? "Deeming" the payment as something doesn't always make it such. If retention payments were limited to HCEs, then the definition would not likely be discriminatory. If it works, consider a maximum compensation limit instead. IMO, the retention payment exclusion is not for working "outside of their regulary scheduled tour of duty" and wd not necessarily qualify like a bonus under the safe-harbor alternative definition. See 1.414(s)-1(d)

Are the rules still the same besides the inflation adjusted numbers? Not sure what you mean?? Where would a plan sponsor go to have a document drafted for this? Is there a prototype we can use which is similar to the 5305 form? Many financial institutions have prototype SEPs that may be integrated with Social Security Is the definition of HCE the same as for a 401k plan? Possibly, the document should give you several choices to choose from. What is meant in your first sentence by the phrase "on an excludable basis"? Amounts that exceed 25% of "taxable" compensation (plus catch-up contributions if SARSEP) are included in income. Amounts that exceed the reduced upper limit are also included in income. Assume plan integrated at $90,000 and the participant earns $200,000 for 2005. The plan uses the maximum spread of 5.7%. The upper limit is reduced by the result of multiplying 5.7% times the lesser of $200,000 or $90,000. Thus, the $42,000 limit is reduced to $36,870. Thus, $36,870 (plus catch-up contributions) is the most that can be contributed and excluded from this participant's gross income. The plan will provide a method to allocate an integrated contribution. Generally a four step method is used. Software is available to crunch the numbers, see--QP-SEP Software Link

JEVD, Actualy any service (whether or not paid) would count as "service" for puposes of the 0, 1, 2, or 3 year SEP requirement. There is no requirement that compensation be paid. All that is required is an employer-employee relationship exists. Whether an otherwise eligible participate does participate would then depend upon whether the employee met the $450 de-minimis exception in the curent year.

If they earned less than $450 in the current year (only) they would not be eligible, provided the plan contains the exclusion for minimum compensatiion.

There are no PLRs on individualoly designed SEPs that deal with a compensation definition issue. Most have dealt with coordination (under prior law) with Code Section 415. It might be worth reading the SEP List of Required Modifications (attached) for prototypes and submit your i.d. plan's definition. Good luck. Please let me now if you are sucessful. SEP_LRM_2002.pdf

I agree with SoCalActuary regarding plan choice. HOWEVER, with regard to the SEP---- SEPs do NOT permit a plan sponsor to use "worked for 6 months" as an eligibility reguirement. The plan must specify either a "0," "1,", "2" or "3" year service requirment. With a "1" year requirement an employee that worked for the organization in the prior year (with or without pay and for any length of time (5 minutes)) is eligible to participate for the entire current year if they would attain the age 21 by the end of the current year. In all lilelyhood, your SEP did not cover all eligible employees and may need fixing. Failure to include an eligible employee undoes the SEP for the year. All contributions for year are excess contributions. Numerous penalties apply. Some may apply after fixing. The qualification defect may be eligible for self-correction under the EPCRS (see Rev. Proc. 2003-44).

mbozek NO. YES. It has been suggested several times that the amount must be withdrawn from the SIMPLE IRA and then deposited into a different IRA that is a traditional IRA. A SIMPLE IRA is not a traditional IRA and can not hold IRA contributions. Therefore, taking into account all principles of tax law, you can not claim a deduction under another section of the Code unless that section grants a deduction. Neither Code Section 408 or 408(p) grant a deduction for contributions made to a SIMPLE IRA by an individual. Contributions by employees to a SIMPLE IRA are not permitted (other than a rollover from another SIMPLE IRA). SIMPLE IRA contributions can not be recharacterized. Do we agree? If not, I am a loss to understand the point you are trying to convey.

ABSOLUTELY, if they were employed on the effective date of the plan and were otherwise eligible (e.g., earned over $450 if required).

I could use the cite for that one. It is a principle of tax law that a taxpayer who is denied a deduction under one section of the IRC ( 408p) can NOT take the deduction under another section for which he is INELIGIBLE, e.g., (408a). This rule seems to make more sense in this situation because there are no IRAs under IRC 408(a) to speak of.

mbozek It was a SIMPLE, it operated as a SIMPLE. I cannot be a defacto anything but a SIMPLE. How can it be a defacto IRA when IRA contributions are made into a SIMPLE (that can not hold traditional IRA contributions).

Let's assume the original document is current. If the document was an amendment to the first plan then you only have one plan, otherwise two plans. If it is an amendment, the original effective date may be reflected on the new document, but the effective date of the amendment can only go back so far. Assuming a 2004 CY plan, the amendment would be effective no sooner than January 1, 2004 (if executed before the 2004 return due date in 2005). Slightly different rules would apply if this was the adoption of a prototype that was recently approved by the National Office of the IRS and then being adopted to replace the existing plan. Hope this helps you.

Medically, why can't she get pregnant? If there were a grave risk to her health (determinded by doctor), upon becoming pregnant, then arguably the care is "preventive" in nature. However, i'd like to see some more guidance on this "hot" issue.

One approach might be to treat contributions made in early 2004 as being for 2003 and so on. Technically, the plan failed for the 2003 year and all of the contributions (made for year to all employees) are excess nondeductible contributions. HOWEVER, assuming the "operational failure" to be "insignificant," self-correction--within the 2-year correction period-- under the EPCRS could be availed of. If actual investment results are not able to be determined, then a reasonable rate of interest is used under the EPCRS. See Rev Proc 2003-44, Section 9. Taxes and penalties will be due on the excess deduction claimed for 2003. The make-up contribution will be currently deductible (or worse case, carried forward). Hope this helps.

The simple will simply be invalidated by the 2005 adoption of the QP for the year. The excess in the SIMPLE can be dealt with (on W-2 and timely removal by e/ee). The remaining amounts in the simple can be rolled over into an IRA (2-year rules met) and then rolled into the QP if it permits.

Since it was a Simple it must be dealt with as a Simple. IRA contributions may not be made into a Simple-IRA. Might it be better (and less expensive) not to fix it, but rather treat it as a bad plan for the year (by including the amounts on the employee's W-2 for 2004). The alternative of discontinuing contributions and retaining the amounts may be costly under EPCRS (in addition to the fees, charges, and penalties under the EPCRS). This would appear to avoid the 10 percent penalty on nondeductible conributions. Although the 6 percent penalty does not appear to apply, to avoid double taxation, the excess (with earnings + or --) should be removed timely.

Thanks, chloe. Arkansas now conforms to federal law for HSA purposes. See House Bill 1064, attached (pdf) ARHB1064.pdf

An informative article regarding HSAs and employees of the State of Florida. Florida HSA - Article Link

You are absolutely correct. The $2,000 can be divided as they choose, but the $600 catch-up contributions (if both 55+) must go into seperate HSAs. I was only looking at this as an aggegate math issue--sorry.