HSA

IRS Proposes Electronic Filing Requirements for Certain Information Returns

The IRS has released a pre-publication version of proposed regulations amending rules intended to increase the filing of electronic returns in accordance with the Taxpayer First Act of 2019. Additionally, the IRS has withdrawn previously proposed regulations regarding electronic filing that were published on May 31, 2018.

The new proposed regulations reduce the threshold by which filers must electronically file from 250 to 100 returns for the 2022 calendar year. For filings required after calendar year 2022, the threshold will be further reduced to 10 returns. Currently, the threshold is determined separately for each type of information return. The proposed regulations would remove this rule, thus, requiring all return types to be aggregated for determining the new thresholds. The regulations further clarify that for purposes of filing amended returns, the amended form must be filed in the same manner (electronic or hardcopy) as the original filing.

Information returns affected by the proposal include, but are not limited to, the following.

  • Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc.
  • Form 1042-S, Foreign Persons’ U.S. Source Income Subject to Withholding
  • Form 945, Annual Return of Withheld Federal Income Tax
  • Form 5498-ESA, Coverdell ESA Contribution Information
  • Form 5498-QA, ABLE Account Contribution Information
  • Form 5498-SA, HSA, Archer MSA, or Medicare Advantage MSA Information
  • Form 8955-SSA, Annual Registration Statement Identifying Separated Participants With Deferred Vested Benefits
  • Form 5500, Annual Return/Report of Employee Benefit Plan
  • Form 5500-SF, Short Form Annual Return/Report of Small Employee Benefit Plan
  • Form 5500-EZ, Annual Return of A One-Participant (Owners/Partners and Their Spouses) Retirement Plan or A Foreign Plan
  • Form 5330, Return of Excise Taxes Related to Employee Benefit Plans

Filers with an inability to file electronically (i.e., lack of Internet service) may file with the IRS to request a waiver.

A period of 60 days for submitting comments on the guidance, or to request a public hearing, will begin upon publication in the Federal Register.


Several Health Savings Bills Proposed

Senator Ben Sasse (R-NE) recently introduced two bills aimed at providing more flexibility for the use of health savings accounts (HSAs). Senate bill 2113 proposes to expand permissible distributions from an employee’s health flexible spending arrangement or health reimbursement arrangement to the employee’s HSA. Senate bill 2099 proposes to make HSAs more broadly available by removing the requirement that individuals be enrolled in a high deductible health plan. Further details of these proposals have not yet been made available.

A third bill has been introduced by Senator John Kennedy (R-LA). The Telehealth HSA Act would allow high deductible health plans to provide telehealth services before meeting the plan deductible without affecting HSA eligibility. Currently, employees may need to pay out of pocket for such services.

All three bills have been referred to the Senate Finance Committee for further consideration.


IRS Provides 2022 Amounts for HSAs and HRAs

IRS Revenue Procedure (Rev. Proc.) 2021-25 provides the 2022 inflation-adjusted amounts for health savings accounts (HSAs) and the maximum amount that may be made newly available for expected benefit health reimbursement arrangements (HRAs).

The HSA 2022 calendar year annual limitation on deductions under Internal Revenue Code (IRC) Sec. 223(b)(2) is $3,650 for an individual with self-only coverage under a high deductible health plan (HDHP) and $7,300 for an individual with family coverage under an HDHP.

In calendar year 2022, under IRC Sec. 223(c)(2)(A), an HDHP is a health plan with an annual deductible that is not less than $1,400 for self-only coverage or $2,800 for family coverage. The annual out-of-pocket expenses—deductibles, co-payments, and other amounts (but not premiums)—cannot exceed $7,050 for self-only coverage or $14,100 for family coverage.

Under Pension Excise Tax Regulation Sec. 54.9831-1(c)(3)(vii), the maximum amount that may be made newly available for the plan year for an excepted benefit HRA is $1,800 for plan years beginning in 2022.


IRS Confirms Tax Filing Extension and Announces Postponed IRA, HSA Contribution Deadline

The IRS has issued Notice 2021-21, in which the IRS makes official the previously announced delay of the April 15, 2021 federal income tax filing due date for individuals for the 2020 tax year to May 17, 2021. This delay is a result of the ongoing COVID-19 Emergency Declaration issued in March 2020.

The tax return due date for an affected taxpayer is automatically postponed to May 17, 2021. An “affected taxpayer” is defined as any person with a federal income tax return or income tax payment filed on a Form 1040, U.S. Individual Income Tax Return, series with an original due date of April 15, 2021. No form, including IRS Form 4868, Application for Automatic Extension of Time To File U.S. Individual Income Tax Return, is required to obtain this relief, and it applies to all schedules, returns, and other forms that are attachments to the Form 1040 series or required to be filed by the Form 1040 series due date.

In conjunction with the Form 1040 series delay, Notice 2021-21 also automatically postpones to May 17, 2021,

  • the time for affected taxpayers to make 2020 contributions to their Traditional IRAs and Roth IRAs, health savings accounts (HSAs), Archer medical savings accounts (Archer MSAs), and Coverdell education savings accounts (Coverdell ESAs), and
  • the time for reporting and payment of the 10 percent additional tax on amounts includible in gross income from 2020 IRA or employer-based retirement plan distributions.

The due date for filing and furnishing forms in the Form 5498, IRA Contribution Information, series is postponed to June 30, 2021.

This relief provided for filing federal income tax returns and paying federal income taxes does not apply to businesses or any other type of taxpayer who files federal income tax returns on forms other than the Form 1040 series. Notice 2021-21 further states that “no extension is provided in this notice for the payment or deposit of any other type of federal tax, including federal estimated income tax payments, or for the filing of any federal return other than the Form 1040 series and the Form 5498 series for the 2020 taxable year.”

While this guidance only applies to the filing of federal tax returns, many states have issued similar delays. Individuals are advised to review their state and local regulations to ensure compliance with all 2020 filing deadlines.


IRS Provides Guidance on Personal Protective Equipment as Medical Expense

The IRS has issued Announcement 2021-7, indicating that amounts paid for personal protective equipment (PPE)—such as masks, hand sanitizer, and sanitizing wipes—that are primarily used to prevent the spread of COVID-19, are treated as amounts paid for medical care under Internal Revenue Code Section 213(d). As a result, the amounts are also eligible to be paid or reimbursed under health flexible spending arrangements (FSAs), health reimbursement arrangements (HRAs), and health savings accounts (HSAs).

Group health plans—including health FSAs and HRAs—may be amended pursuant to this announcement to provide for reimbursement of COVID-19 PPE expenses incurred for any period beginning on or after January 1, 2020. Employers choosing to amend their plans must do so by the last day of the first calendar year beginning after the end of the plan year in which the amendment is effective. Retroactive amendments are not permitted after December 31, 2022.


IRS Announces Extension to File Tax Return

The Treasury Department and IRS have announced that tax filing due dates for 2020 tax year federal income tax returns, including the federal income tax payment deadline, will be automatically extended from April 15, 2021, to May 17, 2021. No special form must be filed to request the filing extension. The IRS will be providing formal guidance in the coming days.

While the postponement of federal income tax payments seems to suggest that certain other actions tied to the normal April 15, 2021 filing deadline may be extended as well—such as making 2020 IRA and health savings account (HSA) contributions, similar to the extension provided in 2020—it is not clear at this time.


IRS Details Additional Temporary Guidance for Cafeteria Plans

The IRS has issued Notice 2021-15, providing additional guidance and flexibility to employee benefit plans offering health FSA and dependent care arrangements. Because of COVID-19, employees participating in these programs are more likely to have unused amounts in these accounts as a result of changes in anticipated expenses during the pandemic. To qualify as a cafeteria plan under IRC Section 125, funds remaining at the end of the plan year generally cannot be carried over to future plan years, and restrictions apply when modifying elections after the start of the plan year.

While initial temporary relief was made available for 2020, the Consolidated Appropriations Act of 2021, enacted in December 2020, provides the following additional flexibility for 2021 and 2022 plan years.

  • Permits post-termination reimbursements through the end of the plan year that participation ceased for health and dependent care FSAs.
  • Creates special rule for dependent care programs, allowing the plan to substitute “under age 14” for “under age 13” as the maximum age for qualifying dependents.
  • Provides carryover of unused funds into the subsequent plan year from the 2020 and 2021 plan years.
  • Allows health and dependent care FSAs to offer a grace period extension of 12 months after the end of the plan year.
  • Permits mid-year election changes by plan participants of health and dependent care FSAs for plan years ending in 2021 without a change in status.

Notice 2021-15 provides illustrative examples of these provisions, details on interaction with COBRA continuation coverage, and timing of plan amendments. The notice also provides additional relief that allows employers to retroactively amend their

  • cafeteria plans to permit mid-year election changes for employer-sponsored health coverage, and
  • health reimbursement arrangements to permit reimbursement of over-the-counter drugs without a prescription and menstrual care products.

Retirement Spotlight: IRS Aims to Clarify 60-Day Postponement Rule for Federally Declared Disasters

At the end of 2019, the Internal Revenue Code (IRC) was amended to create a mandatory 60-day postponement for certain federal tax-related deadlines in the event of a disaster. This new provision was designed to ensure that affected taxpayers would have guaranteed relief while recovering from a natural disaster or other emergency. But this measure didn’t seem to affect how the IRS had already been responding to such events. In fact, the new law created some ambiguity. In an effort to address this uncertainty, the IRS has released proposed regulations. These regulations provide more information about

  • what time-sensitive tax acts are covered;
  • how the 60-day postponement is determined; and
  • how the phrase, “federally declared disaster,” is defined for purposes of this 60-day period.

These regulations make it clear that the practical applicability of the automatic 60-day rule still ultimately depends on the IRS’s granting of deadline relief when disasters happen. And because the IRS has already been doing this—typically granting more than 60 days—there may not be a noticeable change.

60-Day Postponement Rule

The mandatory 60-day postponement rule was added (as IRC Sec. 7508A(d)) by the Taxpayer Certainty and Disaster Tax Relief Act of 2019. (This act was part of the Further Consolidated Appropriations Act, which also contained the SECURE Act.) It requires the IRS to automatically postpone for 60 days certain time-sensitive, federal tax-related deadlines—including those related to retirement savings plans—in response to federally declared disasters that occur on or after December 21, 2019.

The rule applies to taxpayers

  • who reside in or were injured or killed in a disaster area,
  • who have principal places of business in the disaster area,
  • who are relief workers providing assistance in a disaster area, or
  • whose tax records necessary to meet a tax deadline are located in a disaster area.

The IRS already had the authority under IRC Sec. 7508A to extend certain tax-related deadlines for up to one year in response to presidentially declared disasters or terroristic or military actions. The IRS typically makes disaster declarations through news releases, describing the counties affected and the length of the deadline postponement. Extensions typically are 120 days. Some are less. But the 60-day postponement rule ensures at least a minimum time to complete the acts covered by the guidance.

Time-Sensitive Tax Acts

The 60-day postponement statute contains a list of specific time-sensitive, tax-related acts. Those that pertain to retirement plans are

  • making IRA or retirement plan contributions,
  • removing excess IRA contributions,
  • recharacterizing IRA contributions, and
  • completing rollovers.

The proposed regulations point to other time-sensitive acts—specified under IRC Sec. 7508, Treasury Regulations, and IRS Revenue Procedure 2018-58—such as filing IRS Form 5500 for retirement plans and making retirement plan loan payments. Thus, the proposed regulations do not limit the mandatory 60-day postponement to only those acts listed in new IRC Sec. 7508A(d). Instead, they reinforce the IRS’s discretion in identifying which tax-related acts will be postponed.

So, despite the seemingly automatic nature of the new 60-day extension, individuals must still wait for the IRS to grant relief that applies to a specific disaster and to a specific area. If the IRS decides not to postpone a time-sensitive act, the 60-day postponement statute simply doesn’t apply. On the other hand (for disasters with incident dates), if the IRS postpones an act, the postponement must be for at least 60 days.

60-Day Postponement Period

The mandatory 60-day postponement period generally begins on the earliest “incident date” specified in a Federal Emergency Management Agency (FEMA) disaster declaration and ends on the date that is 60 days after the latest incident date. For example, consider a hurricane battering a coastal state for several days. FEMA announces a disaster declaration that is approved by the president. It specifies the earliest incident date for the affected counties as August 15 and the latest incident date (when the flooding ends) as August 19. The deadline postponement begins on August 15 and ends 60 days from August 19.

Under the 60-day postponement statute, however, it is unclear how the 60-day period is calculated when the disaster declaration either does not contain an incident end date or does not contain any incident dates. This happened with the president’s March 13, 2020, emergency coronavirus declaration: no incident date was specified, and no latest incident date has yet been determined. The proposed regulations simply state that in such a case no mandatory postponement period applies. Rather, the IRS will determine the postponement period—under its discretionary authority under IRC Sec. 7508A(a)—not to exceed one year.

Federally Declared Disaster

The 60-day postponement statute uses the phrases “disaster area” and “federally declared disaster” and cites the definitions found in IRC Sec. 165(i)(5). There, “federally declared disaster” is defined as ‘‘any disaster subsequently determined by the President of the United States to warrant assistance by the Federal Government under the Robert T. Stafford Disaster Relief and Emergency Assistance Act.’’ But the words “federally declared disaster” are not used in the Stafford Act. Instead, the Stafford Act uses the terms ‘‘emergency,’’ ‘‘major disaster,’’ and ‘‘disaster (used to refer to both emergencies and major disasters).”

This language difference between IRC Sec. 165(i)(5) and the Stafford Act has led to some misunderstanding. For this reason, the IRS has also amended the regulations under IRC Sec. 165 to clarify that the term “federally declared disaster” includes references to both “major disaster” and “emergency,” as defined in the Stafford Act.

The Takeaway

The IRS is accepting comments on all aspects of the proposed regulations before they are adopted as final. Written or electronic comments and requests for a public hearing must be received by March 15, 2021.These regulations—when made final—may clarify the interplay between the new mandatory 60-day postponement rule and existing disaster relief. But practically, not much is likely to change. The IRS will continue to exercise its considerable authority to postpone tax-related deadlines. Postponements will generally continue to exceed 60 days. And individuals will still rely on the IRS to identify which disasters and tax-related items will qualify for deadline postponement.

Visit ascensus.com for further developments on this and other guidance.

 

Click here for a printable version of this issue of the Retirement Spotlight.


2021 Could See More Retirement and Health Legislation

Despite political partisanship that has marked much of the 116th Congress in 2019 and 2020, there have been some notable exceptions with bipartisan outcomes. The Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019 proved that cooperation is a possibility. That legislation, enacted in December 2019, made significant enhancements to tax-advantaged savings arrangements.

Enactment of the Coronavirus Aid, Relief, and Economic Security (CARES) Act in March 2020 was a unified response to the pandemic that has disrupted many Americans’ lives in both economic and health terms. And, in December 2020, Congress was able to put aside differences in crafting legislation combining additional pandemic relief with needed last-minute federal agency appropriations.

What 2021 will bring is yet to be determined. The Democratic majority in the House of Representatives narrowed in the 2020 general election, and control of the U.S. Senate shifted to Democratic control by the narrowest of margins. A Democrat also now resides in the White House. His legislative agenda has yet to be revealed in detail, but—based on campaign messaging—may include the broadly-defined goal of “equalizing benefits across the income scale.”  This ambition aside, it can be difficult for any president to accomplish legislative objectives with such a narrowly divided Congress.

Unless, that is, these objectives align with those of a majority of lawmakers. Fortunately, tax-advantaged savings legislation has a history of being able to gather bipartisan support. It has win-win dimensions that tend to unify, rather than divide.  For this reason, there is optimism that one or more savings-focused bills could be enacted in 2021. Several introduced during the past two years will likely be re-introduced in the 117th Congress.

Securing a Strong Retirement Act

This legislation—called SECURE 2.0 by some, in reference to 2019’s SECURE legislation—is a further example of bipartisanship. It is jointly sponsored by House Ways and Means Committee Chairman, Representative (Rep.) Richard Neal (D-MA)— and GOP Ranking Member Kevin Brady (R-TX). Due to the prominence of these sponsors, the legislation is considered to have favorable prospects. It includes the following provisions.

  • Require employers—with exceptions for certain new and small businesses—to establish an automatic enrollment deferral-type retirement plan, such as a savings incentive match plan for employees of small employers (SIMPLE) IRA plan.

  • Provide an enhanced small employer plan start-up tax credit for such new plans.

  • Enhance the “saver’s credit” for IRA contributions and for deferral-type employer plan contributions, such as those made to a SIMPLE IRA plan.

  • Exempt up to $100,000 of accumulated IRA and employer-sponsored retirement plan assets from required minimum distribution (RMD) calculations.

  • Increase the RMD onset age from 72 to 75.

  • Reduce penalties for RMD failures.

  • Provide a second (age 60), higher IRA catch-up contribution limit.

  • Index IRA catch-up contributions for inflation.

  • Increase the limit for IRA and retirement plan assets that are exempt from RMD calculations under qualifying longevity annuity contract (QLAC) rules.

  • Reduce certain IRA error penalties and permit more self-correction.

  • Permit matching contributions, e.g., to SIMPLE IRAs—based on student loan payments.

Automatic IRA Act

It is widely accepted that up to 40 percent of American workers do not have access to a workplace retirement plan. A concept that dates back more than a decade proposes universal, automatic saving to an IRA through a worker’s place of employment, if no other retirement plan is available. This is the concept embodied in the Automatic IRA Act, legislation that has been introduced in several previous sessions of Congress.

In the absence of action at the federal level, many states have acted on their own to establish automatic IRA-based saving programs, which—while beneficial for those who are covered—has left geographic gaps, and a patchwork with differing program rules. A uniform national automatic IRA program could close these gaps and address differences.

  • Employers in business less than 2 years or employing fewer than 10 employees would be exempt.

  • Employees would be automatically enrolled and contributions withheld from pay, but they would be able to opt out.

  • Accounts would be Roth IRAs unless a Traditional IRA was elected.

  • Contributions would likely begin at 3 percent of pay, but with latitude to range between 2 percent and 6 percent.

  • Investments would include balanced, principal preservation, and target-date funds, as well as guaranteed insurance contracts.

 Past sponsors of automatic IRA legislation have included Rep. Richard Neal (D-MA) and U.S. Senator Sheldon Whitehouse (D-RI).

HSA Enhancements

Affordable health insurance for Americans continues to be an extremely challenging goal. One increasingly common option—an alternative to the comprehensive “major medical” health insurance model—is a high deductible health insurance plan linked to a savings and spending account known as a health savings account, or HSA.

This approach is intended to offer a path to lower health insurance premiums, and to allow individuals to save in a tax-advantaged manner for expenses that are below their health plan deductible, and for co-pay amounts they owe. What initially began as a temporary test program under medical savings account (MSA) nomenclature later evolved into the HSA we know today.

With many U.S. employers offering employees an HSA-based program as one—or perhaps the only—health insurance option, much focus has been on how the HSA might be tweaked to improve its usefulness. Following are some of the proposed HSA modifications, a composite of provisions from several bills introduced in the 116th Congress. Some, or all, could be proposed again in the 117th Congress that has just been sworn in.

  • Increase maximum annual HSA contributions; some have proposed doubling the limits.

  • Expand the treatments for which a plan’s high deductible need not be met before benefits commence, such as chronic care services and more medications, including nonprescription drugs.

  • Permit care at onsite employer or retail clinics without forfeiting HSA contribution eligibility.

  • Treat costs of participating in a fixed-fee primary care arrangement as HSA-eligible expenses.

  • Allow coverage of offspring under a parent’s HSA-compatible health plan to age 26; would mirror the Affordable Care Act (ACA).

  • Define ACA bronze-level and certain catastrophic health insurance plans as HSA-compatible.

  • Treat a defined portion of HSA accumulations spent for “fitness and health” as HSA-eligible expenses.

  • Allow a fixed amount from health flexible spending accounts (health FSAs) and health reimbursement arrangements (HRAs) remaining at year’s end to be rolled over to an HSA.

  • Allow Medicare-eligible individuals enrolled only in Part A (Medicare-provided hospital care) to remain HSA contribution-eligible.

Other Legislative Ambitions

Beyond the possibilities noted above, other initiatives that may be in play in the 117th Congress could include getting closer to universal availability of 401(k)-type workplace retirement plans and addressing the solvency of under-funded defined benefit pension plans. These could be more contentious, carrying as they might the stigmas of “mandate,” and “bailout,” both of which draw resistance from a substantial number of lawmakers.

Stay tuned for more details on proposed legislation and regulatory updates that stand to impact the savings plan landscape. In the meantime, check out our latest analysis on industry and regulatory news here on ascensus.com.