PART I: THE IRS TAKES A HATCHET TO THE NON-SPOUSE ROLLOVER PROVISION OF THE PENSION PROTECTION ACT
One of the most intriguing provisions of The Pension Protection Act of 2006 (“PPA”) is the ability for a non-spouse beneficiary who inherits a retirement plan (e.g. 401(k), pension) to transfer the balance to an “inherited” IRA. The implications are many with benefits accruing to unmarried couples, siblings, gay/lesbian partners and virtually any non-spouse beneficiary.
Leave it to the IRS to wreck the benefit! To understand the problem, let’s take a look back at where we’ve come from.
Historically, only surviving spouses who were beneficiaries of a 401(k) or pension could roll over the account balance into an “inherited” IRA.
The strategy preserves the benefit of tax-deferral as the account could be distributed over time using traditional life-expectancy payout methods.
Non-spouse beneficiaries faced a less favorable situation. They were typically forced to take an immediate lump-sum creating an immediate income tax liability, foregoing future tax-deferral and possibly increasing their current marginal income tax bracket.
PPA resolved this situation by allowing the non-spousal IRA rollover.
Congress instructed the IRS to issue rules for implementation. (As an aside, it’s common for Congress to pass legislation and leave implementation to someone else. Sarbanes-Oxley is an example of legislation with good intention gone awry due to implementation guidelines issued by the SEC.
The rules provided by the IRS state that rollovers are permissible to the extent the 401(k) or pension plan permits a non-spousal rollover.
This is ridiculous. Employers have no desire to take on additional administrative burden. They are under no obligation to amend their benefit programs to include non-spousal benefits. The bottom line is that PPA’s benefit is taken away by the IRS rule. It was pointless for
Congress to enact this portion of PPA only to have their implementation arm (the IRS) take it away.
PART II: HEALTH SAVINGS ACCOUNTS EXPLAINED
Health savings accounts (“HSA’s”) are a relatively new planning vehicle. Like most things in life, they are wrought with pros and cons.
Let’s take a look.
Essentially, HSA’s are tax-advantaged healthcare funding accounts.
Money is contributed on a pre-tax basis. Growth is tax-deferred.
Withdrawals are tax-free to the extent they are used for medical expenses. Otherwise, withdrawals are subject to income tax and a 10% penalty for those ages 64 and younger.
The upfront tax deduction is an adjustment to gross income. Such “above the line” deductions have a twofold advantage in that they are not subject to the alternative minimum tax (“AMT”) nor are they subject to any limitations/reductions on itemized deductions.
Contributions max out at $2,850/yr (or $5,650/yr for a family plan).
Qualifying for an HSA is straightforward. You must…
(1) have a “high deductible health plan”
(2) not be covered by any other health insurance plan that is not a high deductible plan
(3) not be eligible to be claimed as a dependent on someone else’s income tax return
High deductible plans are those with a minimum deductible of $1,050/yr and maximum out-of-pocket costs of $5,500/yr. For family plans, the figures are $2,100/yr and $11,000 respectively.
Finally, figures pertaining to HSA’s are eligible for inflation adjustment.
Thus, all above figures (e.g. contribution limits, deductibles, out-of pocket costs) are for 2007 and will increase from year to year.