Insurance

Updating Beneficiary Designations & Benefits of Health Savings Accounts (HSA)

The importance of updating beneficiary designations

Health Savings AccountsMost of us have more than enough to do. We’re on the go from early in the morning until well into the evening — six or seven days a week. Thus, it’s no surprise that we may let some important things slide. We know we need to get to them, but it seems like they can just as easily wait until tomorrow, the next day, or whenever.

A U.S. Supreme Court decision reminds us that sometimes “whenever” never gets here and the results can be tragic. The case involved a $400,000 employer-sponsored retirement account, owned by William, who had named his wife, Liv, as his beneficiary in 1974 shortly after they married. The couple divorced 20 years later. As part of the divorce decree, Liv waived her rights to benefits under William’s employer-sponsored retirement plans. However, William never got around to changing his beneficiary designation form with his employer.

When William died, Liv was still listed as his beneficiary. So, the plan paid the $400,000 to Liv. William’s estate sued the plan, saying that because of Liv’s waiver in the divorce decree, the funds should have been paid to the estate. The Court disagreed, ruling that the plan documents (which called for the beneficiary to be designated and changed in a specific way) trumped the divorce decree. William’s designation of Liv as his beneficiary was done in the way the plan required; Liv’s waiver was not. Thus, the plan rightfully paid $400,000 to Liv.

The tragic outcome of this case was largely controlled by its unique facts. If the facts had been slightly different (such as the plan allowing a beneficiary to be designated on a document other than the plan’s beneficiary form), the outcome could have been quite different and much less tragic. However, it still would have taken a lot of effort and expense to get there. This leads us to a couple of important points.

If you want to change the beneficiary for a life insurance policy, retirement plan, IRA, or other benefit, use the plan’s official beneficiary form rather than depending on an indirect method, such as a will or divorce decree.

It’s important to keep your beneficiary designations up to date. Whether it is because of divorce or some other life-changing event, beneficiary designations made years ago can easily become outdated.

One final thought regarding beneficiary designations: While you’re verifying that all of your beneficiary designations are current, make sure you’ve also designated secondary beneficiaries where appropriate. This is especially important with assets such as IRAs, where naming both a primary and secondary beneficiary can potentially allow payouts from the account to be stretched out over a longer period and maximize the time available for the tax deferral benefits to accrue.

The many benefits of a Health Savings Account (HSA)

A Health Savings Account (HSA) represents an opportunity for eligible individuals to lower their out-of-pocket health care costs and federal tax bill. Since most of us would like to take advantage of every available tax break, now might be a good time to consider an HSA, if eligible.

Herman & Company CPA’s proudly serves Bedford Hills NY, Chappaqua NY, Harrison NY, Scarsdale NY, White Plains NY, Mt. Kisco NY, Pound Ridge NY, Greenwich CT and beyond.

An HSA operates somewhat like a Flexible Spending Account (FSA) that employers offer to their eligible employees. An FSA permits eligible employees to defer a portion of their pay, on a pretax basis, which is used later to reimburse out-of-pocket medical expenses. However, unlike an FSA, whatever remains in the HSA at year end can be carried over to the next year and beyond. In addition, there are no income phaseout rules, so HSAs are available to high-earners and low-earners alike.

Naturally, there are a few requirements for obtaining the benefits of an HSA. The most significant requirement is that an HSA is only available to an individual who carries health insurance coverage with a relatively high annual deductible. For 2015, the individual’s health insurance coverage must come with at least a $1,300 deductible for single coverage or $2,600 for family coverage. For many self-employed individuals, small business owners, and employees of small and large companies alike, these thresholds won’t be a problem. In addition, it’s okay if the insurance plan doesn’t impose any deductible for preventive care (such as annual checkups). Other requirements for setting up an HSA are that an individual can’t be eligible for Medicare benefits or claimed as a dependent on another person’s tax return.

Individuals who meet these requirements can make tax-deductible HSA contributions in 2015 of up to $3,350 for single coverage or $6,650 for family coverage. The contribution for a particular tax year can be made as late as April 15 of the following year. The deduction is claimed in arriving at adjusted gross income (the number at the bottom of page 1 on your return). Thus, eligible individuals can benefit whether they itemize or not. Unfortunately, however, the deduction doesn’t reduce a self-employed person’s self-employment tax bill.

When an employer contributes to an employee’s HSA, the contributions are exempt from federal income, Social Security, Medicare, and unemployment taxes.

An account beneficiary who is age 55 or older by the end of the tax year for which the HSA contribution is made may make a larger deductible (or excludible) contribution. Specifically, the annual tax-deductible contribution limit is increased by $1,000.

An HSA can generally be set up at a bank, insurance company, or other institution the IRS deems suitable. The HSA must be established exclusively for the purpose of paying the account beneficiary’s qualified medical expenses. These include uninsured medical costs incurred for the account beneficiary, spouse, and dependents. However, for HSA purposes, health insurance premiums don’t qualify.

Small Business Affordable Care Act Reporting Responsibilities

Small business obamacare reporting

Extended deadlines, confusing terms for business sizes and hiccups in the Small Business Health Options Program (SHOP) Marketplace may have small business owners dreading the next steps for IRS forms and coverage reporting. Fortunately, only 4% of small businesses are subject to the Affordable Care Act (ACA) reporting requirements or the employer responsibility provision.

The good news is that reporting for the 2014 calendar year is entirely voluntary, and there will be no negative impact or tax liability for either employers or employees, if small business owners decide to report for this year.

Defining Small Business Sizes:

Small Employer: Generally businesses with fewer than 50 full-time employees.

Large Employer: 50 or more full time or full time equivalent employees.

Not sure how many full time employees or full time equivalent (FTE) employees you have? Head over to the healthcare.gov FTE calculator.

Reporting Start Dates:

100 or more employees: Minimal Essential Coverage (MEC) must start January 1, 2015, with mandatory reporting filed no later than February 29th, 2016 or March 31, 2016 if e-filing.

50 or more employees: While MEC is not required until January 1, 2016, reporting for the 2015 calendar year is required.

25 or less: Reporting is encouraged, but not mandatory. However, small businesses of this size may be eligible for tax credits and other benefits if they voluntarily file reports for 2014 or 2015. Learn more about these tax credits at the IRS website.

What is Reported

Small businesses must report about the coverage (if any) offered, per month, to their full-time employees. This information, reported per employee, must include the lowest cost of self-only coverage offered to employees.

Forms, Forms and More Forms

The IRS has, in an effort to streamline the reporting process for businesses, created single, combined form for information reporting. The forms created (6055 & 6056) will be used by employers to report to both the IRS and to furnish employees with information about their offered coverage.

Simplified Reporting Options

Employers that offer a qualifying offer – minimal value coverage for a full time employee that costs the employee no more than $1,100 and also offers an option family coverage – have an even simpler way to report for 2015. Business owners must inform employees that they may be eligible for premium tax credits and provide standard statements for all reporting.

If the employee receives a qualifying year-round offer, the employer needs to report only that they received the qualifying offer 12 months out of the year and the name, address, and taxpayer identification number of said employee. A copy of this or a statement of the same information must be furnished to the employee.

If the employee receives this qualifying offer for fewer than 12 months out of the year, the IRS accepts reporting that simply indicates an offer was made with a code entered for each month the offer was made.

These simplified options were brought about in a response to feedback from stakeholders, and are the results of the IRS trying to make a difficult and often costly change in the way small businesses are run a little easier on business owners.

W-2 Reporting

If an employer provides coverage under a group health plan, they must report the value of the healthcare provided on employee W-2 forms in Box 12 using the code DD to identify the amount. Find out more about W-2 reporting from the IRS page that also provided a chart on W-2 reporting.

While the IRS has instituted a policy of leniency for employers throughout this transition period, it is always a good idea to find webinars online, local workshops, or work with a small business accountant to better understand the responsibilities of a small business owner.

If you feel overwhelmed or would like more information, contact Paul Herman for a consultation, (914) 400-0300.

Additional 0.9% Medicare Tax

Westchester accountant Paul Herman of Herman & Company CPA’s has all the answers to your personal finance questions! Individuals must pay an additional 0.9% Medicare tax on earned income above certain thresholds. The employee portion of the Medicare tax is increased from 1.45% to 2.35% on wages received in a calendar year in excess of $200,000 ($250,000 for married couples filing jointly; $125,000 for married filing separately). Healthcare tax update from westchester ny accountantEmployers must withhold and remit the increased employee portion of the Medicare tax for each employee whose wages for Medicare tax purposes from the employer are greater than $200,000.

There is no employer match for this additional Medicare tax. Therefore, the employer’s Medicare tax rate continues to be 1.45% on all Medicare wages. An employee is responsible for paying any of the additional 0.9% Medicare tax that is not withheld by an employer. The additional tax will be reported on the individual’s federal income tax return.

Because the additional 0.9% Medicare tax applies at different income levels depending on the employee’s marital and filing status, some employees may have the additional Medicare tax withheld when it will not apply to them (e.g., the employee earns more than $200,000, is married, filing jointly, and total annual compensation for both spouses is $250,000 or less). In such a situation, the additional tax will be treated as additional income tax withholding that is credited against the total tax liability shown on the individual’s income tax return.

Alternatively, an individual’s wages may not be greater than $200,000, but when combined with a spouse’s wages, total annual wages exceed the $250,000 threshold. When a portion of an individual’s wages will be subject to the additional tax, but earnings from a particular employer do not exceed the $200,000 threshold for withholding of the tax by the employer, the employee is responsible for calculating and paying the additional 0.9% Medicare tax. The employee cannot request that the additional 0.9% Medicare tax be withheld from wages that are under the $200,000 threshold. However, he or she can make quarterly estimated tax payments or submit a new Form W-4 requesting additional income tax withholding that can offset the additional Medicare tax calculated and reported on the employee’s personal income tax return.

For self-employed individuals, the effect of the new additional 0.9% Medicare tax is in the form of a higher self-employment (SE) tax. The maximum rate for the Medicare tax component of the SE tax is 3.8% (2.9% + 0.9%). Self-employed individuals should include this additional tax when calculating estimated tax payments due for the year. Any tax not paid during the year (either through federal income tax withholding from an employer or estimated tax payments) is subject to an underpayment penalty.

The additional 0.9% Medicare tax is not deductible for income tax purposes as part of the SE tax deduction. Also, it is not taken into account in calculating the deduction used for determining the amount of income subject to SE taxes.

Individual is responsible for paying the additional 0.9% Medicare tax

Josh and Anna are married. Josh’s salary is $180,000, and Anna’s wages are $150,000. Assume they have no other wage or investment income. Their total combined wage income is $330,000 ($180,000 + $150,000). Since this amount is over the $250,000 threshold, they owe the additional 0.9% Medicare tax on $80,000 ($330,000 -$250,000). The additional tax due is $720 ($80,000 × .009). Neither Josh’s nor Anna’s employer is liable for withholding and remitting the additional tax because neither of them met the $200,000 wage threshold. Either Josh or Anna (or both) can submit a new Form W-4 to their employer that will result in additional income tax withholding to ensure the $720 is properly paid during the year. Alternatively, they could make quarterly estimated tax payments. If the amount is not paid until their federal income tax return is filed, they may be responsible for the estimated tax penalty on any underpayment amount (whether the underpayment is actually income taxes or the additional Medicare taxes).

Westchester NY accountant Paul Herman of Herman & Company CPA’s is here for all your financial needs. Please contact us if you have questions about these provisions or any other tax compliance/planning issues, and to receive your free personal finance consultation!

Herman and Company CPA’s proudly serves Rye Brook NY, Larchmont NY, Scarsdale NY, Purchase NY, Pound Ridge NY, Mamaroneck NY, Stamford CT and beyond.

 Photo Credit: Life Mental Health via Photopin cc

Any U.S. tax advice contained in the body of this website is not intended or written to be used, and cannot be used, by the recipient for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions.