Monday, July 24, 2017

Health Saving Accounts: An Underutilized Opportunity in a Time of Uncertain Healthcare Changes

By: Peter Domas

Regardless of whether there will be revisions to, repeal of, or no changes at all to the Affordable Care Act, patients will most likely continue to have a larger financial responsibility for their medical care.  This is true whether the insurance is provided through an employer, purchased individually, or offered through Medicare, all of which will likely continue to pass to their beneficiaries higher deductibles and co-pays that must be paid by the individuals when receiving care.  

A health savings account (HSA) offers individuals participating in high-deductible health insurance plans (currently a deductible of $1,300 for an individual, and a deductible of $2,600 for a family) the opportunity to save pretax dollars and use these funds tax-free to pay for qualified medical expenses.  While Medicare beneficiaries cannot contribute to an HSA, funds saved prior to enrolling in Medicare can be used for Medicare expenses in retirement. Unused funds rolling over from year to year and can be invested similar to a 401(k).  

While Health Savings Accounts have been around since 2004, and are gaining in popularity, they are still significantly underutilized by eligible individuals. In 2016, only 20 million individuals (less than 10% of the population) were enrolled in an HSA, only a 3.4% increase from the prior year. In addition, at the end of 2015 the average HSA balance was only $1,844, with individuals under 25 averaging only $759 and individuals over 65 averaging $3,623 in savings. This low amount of savings is staggering given estimates of healthcare expenses in retirement, which can exceed $250,000.  

The low utilization also demonstrates a significant missed opportunity for not only planning for future healthcare expenses but also tax savings which could significantly increase resources available in retirement. HSAs provide an unusual triple tax advantage of allowing a tax deduction upon contribution, deferred taxes on growth of the investment in the plan, and a tax free withdrawal for qualifying healthcare expenses.  Most tax deferred savings programs provide for only two of these three benefits.  For example a 401(k) or an IRA allow for a tax deduction on contributions and deferred taxes on growth, but distributions from the plan are taxed. Roth IRAs require after tax contributions, but allow for growth and distributions tax free.   

As an additional benefit, HSA’s allow for distributions to cover non-medical expenses after age 65 without a penalty.  The funds distributed will receive a similar tax treatment to a 401(k) or IRA, i.e. taxed on distributions. As a result, an HSA can function as a back-up retirement saving plan, and can be useful to increasing tax deferred contributions when an individual’s contributions to a 401(k) or IRA have met tax deductible limits. In fact, because of the triple tax benefits and possible taxable withdraw on non-medical expenses in retirement, a good case can be made that contributions to an HSA should be maxed out prior to contributions to other retirement plans.  

Not all individuals qualify to participate in an HSA.  Individuals should consult their employee benefits representative and their tax professional to determine whether they could qualify for an HSA and any tax benefits from contribution to an HSA.

For more information, please contact Peter Domas in the Troy, Michigan office at 248-433-7595.

Monday, July 17, 2017

IRS Scrutiny of Plan Loans Increases, But IRS Provides Helpful Guidance

By: Eric W. Gregory

The Internal Revenue Service has increased its level of scrutiny on the limitations imposed on participant loans from defined contribution retirement plans. Internal Revenue Code Section 72(p) generally limits a participant’s plan loans to a total of $50,000 or half of the participant’s vested balance, whichever is smaller. Additionally, this limit is reduced by the participant’s highest outstanding balance of loans during the calendar year prior to the day any new loan is made. This limit is intended to prevent participants from constantly maintaining a $50,000 loan balance. 

In a recent memorandum to IRS Employee Plans Examination employees, the IRS provided two acceptable methods of making this determination, using the following example: 

A participant borrowed $30,000 in February, which was fully repaid in April, and $20,000 in May, which was fully repaid in July, before applying for a third loan in December. The plan may determine that no further loan would be available, because $30,000 plus $20,000 equals $50,000. Alternatively, the plan may identify “the highest outstanding balance” as $30,000, and permit the third loan of $20,000. This assumes that to meet other Section 72(p) requirements, the participant has a vested accrued benefit of more than $100,000, and the loan is repayable in 5 years and requires substantially level amortization. 

The memo indicates that examiners are to determine whether the defined contribution plan has calculated the “highest outstanding loan balance” in one of the two ways as provided in the example if the defined contribution plan has made two or more loans to the same participant during a calendar year.

For more information on plan loans, please contact EricGregory at or 248-433-7669, or any other member of the Employee Benefits group.


Monday, July 10, 2017


By: Peter Sheldon

If you own stock that is currently worth less than what you paid for it you might wish to consider selling it and then reacquiring it by purchase -- if you think that the stock has reached its low point but feel that it is likely to bounce back and bounce back soon.  However, if you have something like this in mind, you should be aware of the so called “wash sale” rule.  That rule basically provides that if a non-securities dealer sells stock at a loss the loss will not be deductible for tax purposes if the taxpayer acquires substantially identical stock within the so called “wash sale period” -- which is the sixty one day period that begins thirty days before the sale and ends thirty days after the sale.  That is the bad news.  The good news is that the disallowed loss can be added to the cost basis of the substantially identical stock that you acquire.

For example, if on January 15, 2017 you acquired one hundred shares of corporation X stock for $1,000; then sell it on December 15, 2017 for $600; then acquire substantially identical stock on January 5, 2018 for $700 -- the $400 loss on the December 15, 2017 sale ($1,000 less $600) would not be deductible on your 2017 income tax return but that disallowed loss would be added to the basis of the stock that you acquire by purchase on January 5, 2018 -- thus increasing the basis of the stock that you would then own from $700 to $1,100.  Moreover, the holding period of the stock that you now own would include the period during which you held the stock that was sold on December 15, 2017 for purposes of determining whether any subsequent sale of the stock that you now own is long term or short term.

Other considerations may come into play concerning this rule depending upon one’s particular facts and circumstances.  For example, this rule can apply even if you don’t actually acquire substantially identical securities within the wash sale period; the rule would apply as well if you merely contract or obtain an option to acquire substantially identical securities within that period. 

If you have questions or desire additional information regarding this subject feel free to contact Peter Sheldon in the Lansing, Michigan office at 517-487-4720. 

Monday, July 3, 2017

IRS issues Rev. Proc. 2017-34 to Extend Time to Make Portability Election

By: Tara Halbert

For individuals dying after December 31, 2010, Section 2010(c) of the Internal Revenue Code provides that the unused estate tax exemption of the first deceased spouse is “portable” between spouses at death.  Under this law, a surviving spouse’s estate can use the unused estate tax exemption amount of the first spouse to die in addition to the surviving spouse’s own estate tax exemption, which can result in significant estate tax savings at the death of the second spouse.  To qualify for portability of the estate tax exemption, the estate of the first spouse to die must file a timely-filed Federal estate tax return (Form 706). If the estate fails to file a Form 706, the first deceased spouse’s estate tax exemption may not be used by the second spouse, which could generate estate tax that would not otherwise be owed. Since the portability rule was enacted, the IRS has received numerous requests for relief from estates that failed to timely file a Form 706 to elect portability. 

The IRS recently issued Rev. Proc. 2017-34 to allow estates that failed to file a timely-filed Form 706 for the purpose of electing portability time to correct that mistake. Rev. Proc. 2017-34 provides an automatic extension until the later of (i) January 2, 2018 or (ii) two years after the decedent’s death to file a Form 706 for the purpose of making a portability election. It is important to note that this automatic extension of time to file a Form 706 does not apply to estates that were required to file a Federal estate tax return because the value of the decedent’s gross estate exceeded the decedent’s available estate tax exemption amount. When filing a Form 706 under Rev. Proc 2017-34 to elect portability, the executor must write “filed pursuant to Rev. Proc. 2017-34 to elect portability under § 2010(c)(5)(A)” on the top of the Form 706. 

A surviving spouse’s estate may request a refund based on the extension granted under this Rev. Proc. if the surviving spouse’s estate paid estate tax due to a failure to file a Form 706 to elect portability at the death of the first spouse. This relief is only available if the time prescribed in §6511(a) for filing a claim for credit or refund of an overpayment of tax has not expired – i.e., within 3 years from the time the return was filed or 2 years from the time the tax was paid, whichever expires later, and the extension of time to elect portability under Rev. Proc. 2017-34 does not extend the time for filing a claim or refund for overpayment of estate tax.  

If you have any questions or would like more information, please contact Tara N. Halbert in the Lexington, Kentucky office at 859-899-8711

Monday, June 26, 2017

ABLE Accounts - Savings Tool for Special Needs Individuals

By: Joan Skrzyniarz (Member, Troy)

ABLE (Achieving a Better Life Experience Act) accounts have become a popular savings tool for special needs individuals since the ABLE Act became law in December of 2014.  Now that such accounts have been in existence for few years, many individuals are more familiar with the benefits of establishing an ABLE account.  However, it is important to remember when an ABLE account should not be used:  1)  for an individual who was not disabled before age 26; 2) when receiving an inheritance or settlement that exceeds $14,000 (or annual gift tax exclusion amount); 3) for a beneficiary who may be susceptible to exploitation, given that a beneficiary has the unilateral right to withdraw money from the ABLE account; and 4) as the sole answer to estate planning for an individual with special needs.  An ABLE account should not replace a conversation with your estate planner on the potential benefits of a special needs trust. 
For more information, contact Joan Skrzyniarz in the Troy, Michigan office at 248-433-7521.

Monday, June 19, 2017

If Timely Notice is Given, the Cost to Correct a 401(k) Exclusion Error May Be Reduced

By:  Deborah L.Grace (Member, Troy)

Occasionally, an employer may determine that it did not withhold deferral contributions for a new employee in accordance with the terms of its 401(k) plan.  If the plan has an automatic enrollment feature, and the error is found within 9 1/2 months after the end of the plan year in which the error occurred, the cost to correct the error is reduced if the employer provides the employee with a notice of the error within 45 days of the date that deferrals are started.  

The notice must include general information about the error, such as the time when deferrals should have started and the percentage that would have been deferred, the approximate date when deferrals will begin, confirmation that a corrective match has or will be made, a description of how the employee may increase his or her deferrals to make up for the missed deferral opportunity, the plan name, and the name, address and telephone number of a plan contact.  

If this notice is provided timely, then the employer contribution consists solely of the match that the employee would have received if contributions had started on a timely basis.  If timely notice is not given, then the employer also owes a missed deferral contribution of 50% of the amount that would have been withheld from the employee’s pay if deferrals had started timely.   

Similar rules apply for failure to correctly withhold salary deferrals from a non-automatic enrollment plan.  While these safe harbor rules have been in existence since 2015, we still encounter clients who do not know that by providing notice of the correction within 45 days of the date that deferrals commence they may reduce their correction costs.  If you or your clients have questions about correcting salary deferrals errors, please call Deb Grace in the Troy, Michigan office at 248-433-7217. 


Monday, June 12, 2017

Tax Reform 2017 - Will it Ever Come?

By:  Peter J. Kulick
For tax attorneys, tax reform is always a hot topic.  President Trump was elected with GOP majorities in both chambers of Congress, which would normally make the forecast for tax reform actually being enacted favorable.  While the early conventional wisdom suggested comprehensive tax reform was possible by Labor Day; the political reality makes 2018 more likely to see the light of tax reform.

What will tax reform look like?  The answer is we do not really know because the details have been incredibly light.  The Trump Administration has released a “framework” for tax reform, but did not take the usual step of releasing a “Green Book”.  The Green Book provides a detailed discussion of tax policy proposals, including an explanation of each changes and the reason for the policy changes. 

To analyze tax reform, it may be appropriate to consider the typical tax policy mantra: “broaden the base, lower the rates.”  The concept is quite simple -- aim for revenue neutral law changes by eliminating numerous deductions and lower the marginal tax rates.  Sounds familiar?  The following is a summary of the Trump Administration’s tax reform framework:
  1. Reduce the corporate tax rate to 15%, from the current highest rate of 35%.
  2. Offer taxpayers a one-time opportunity to repatriate foreign earnings at no or a low tax cost.
  3. Eliminate the world-wide tax philosophy of the Internal Revenue Code of 1986 and replace it with a territorial tax approach -- meaning only U.S. activities would be reached by the Code.
  4. Reduce the individual tax rates to 3 brackets at yet-to-be determined rates.
  5. Broaden the base by eliminating many existing tax deductions.  From public comments, we know that the Trump Administration has backed away from eliminating the interest exclusion for state and local bonds, eliminating the home interest deduction, and eliminating the charitable contribution deduction.
While the framework is light on details, the scope of reform embedded in the framework suggests a comprehensive, wide-ranging tax reform effort.  There is also a strong desire to make any tax reform permanent, which means lost revenue will ultimately need to be offset by savings.  All these signs point to a long, protracted policy debate.  In turn, the political realities call into question whether meaningful tax reform can be enacted by the end of 2018.

If you have any questions, please contact Peter Kulick in the Lansing, Michigan office at 517-487-4729.