In This Issue

• Are You in a Health Plan With a High Deductible? New Health Savings Accounts Can Help
• Cost of Living Adjustments for Qualified Plans
• Changes Affecting Ohio Probate and Estate Administration
• 2004 Retirement Plan Contribution Limits

Are You in a Health Plan With a High Deductible?

New Health Savings Accounts Can Help

By Paul D. Ritter, Jr.

As the cost of healthcare increases, individuals and employers continue to look for methods to reduce the cost of healthcare. If healthcare is provided through insurance, premiums can be reduced by increasing the amount which must be paid by the individual as a deductible before reimbursement commences, or by lowering the amount which will be paid by the insurance company for out of pocket expenses incurred by the individual. New legislation, effective January 1, 2004, has been enacted to provide tax-favored treatment for amounts that are contributed to a Health Savings Account and are used to pay medical expenses for the benefit of the account owner. The Internal Revenue Service in Notice 2004-2 has provided guidance for establishing Health Savings Accounts, summarized as follows:

A. Health Savings Accounts

A Health Savings Account (HSA) is a tax-exempt trust or custodial account which is established exclusively for the purpose of paying qualified medical expenses of the beneficiary of the account. An HSA, as established for the benefit of an individual, is owned by that individual and is portable so that the HSA remains the property of the employee even if the employee changes employers or leaves the workforce. Contributions made to an HSA by an eligible individual are deductible by the individual in determining adjusted gross income and, therefore, are deductible whether or not the individual itemizes deductions. If an employer makes contributions to an HSA for an employee, the amount contributed is excluded from the gross income of the employee. The employer contributions are not subject to income tax withholding or FICA or FUTA tax. The HSA is exempt from tax as long as it is an HSA, so that earnings on amounts in an HSA are not included in gross income while in the HSA. Distributions from an HSA used exclusively to pay for qualified medical expenses of the account beneficiary, the beneficiary's spouse, or dependents are excludable from gross income. Any amount of the distribution not used exclusively to pay for qualified medical expenses is includable in gross income and is subject to an additional 10% tax on the amount includable, unless made after the beneficiary's death, disability, or attaining age 65.

B. Individuals Eligible to Establish an HSA

An HSA can be established by an "eligible individual." Eligibility is determined on a monthly basis. An eligible individual is a person who: (1) is covered under a high-deductible health plan, which is a plan with an annual deductible of at least $1,000 for self-only coverage and which pays annual out-of-pocket expenses in amounts which do not exceed $5,000 (for family coverage, the annual deductible is $2,000 and the out-of-pocket limit is $10,000); (2) is not also covered by any other health plan that is not a high-deductible health plan; (3) is not entitled to benefits under Medicare; and (4) may not be claimed as a dependent on another person's tax return.

C. How to Establish an HSA

An eligible individual can establish an HSA with a qualified HSA trustee or custodian, similar to establishing a qualified IRA. No permission or authorization from the IRS is necessary to establish an HSA, and an eligible individual who is an employee may establish an HSA with or without involvement of the employer. The HSA trustee or custodian must be an insurance company, a bank or any person previously approved by the IRS to be a trustee or custodian of an IRA. You can check with your bank or insurance company for information as to establishing an HSA.

D. Contributions to an HSA

Contributions may be made to an HSA established by an individual employee by the employee, the employer of the employee, or both the employee and the employer. Family members may also make contributions to an HSA on behalf of another family member if that other family member is an eligible individual. There is a limit as to the amount that can be contributed to an HSA on an annual basis. Although the maximum contribution is an annual amount, the amount is determined separately for each month, determined as of the first day of each month. For 2004, the maximum monthly contribution for eligible individuals with self-only coverage is 1/12 of the lesser of (a) 100% of the annual deductible under the high-deductible health plan, or (b) $2,600. For eligible individuals with family coverage under a high-deductible health plan, the maximum monthly contribution is 1/12 of the lesser of (a) 100% of the annual deductible under the high-deductible health plan, or (b) $5,150. However, there is an additional benefit for individuals age 55 or older and younger than 65, who can increase their maximum contribution by $500 in 2004. This catch-up amount will increase in $100 increments annually, until the catch-up amount reaches $1,000 in 2009. After an individual has attained age 65, contributions, including catch-up contributions cannot be made to an individual's HSA. Contributions to an HSA must be made in cash.

E. Distributions From an HSA

An individual is permitted to receive distributions from an HSA at any time. The distributions receive tax-favored treatment as described above, as long as the distributions are for "qualified medical expenses." Qualified medical expenses are expenses paid by the account beneficiary, his or her spouse or dependents for medical care as defined in §213(d) of the Internal Revenue Code, but only to the extent the expenses are not covered by insurance or otherwise. The qualified medical expenses must be incurred only after the HSA has been established. Medical expenses paid from an HSA cannot be claimed as an itemized deduction for medical expenses on the individual's federal income tax return.

If the account beneficiary is no longer an eligible individual (e.g., the beneficiary is over age 65 or no longer under a high-deductible health plan), distributions used exclusively to pay for qualified medical expenses continue to be excludable from gross income. Any distribution not used exclusively to pay for qualified medical expenses of the account beneficiary, spouse or dependents is taxable income and subject to the additional 10% tax, as discussed above. The determination as to whether HSA distributions are used exclusively for qualified medical expenses is made solely by the individual account beneficiary, who should maintain records sufficient to prove that the distributions have been made exclusively for qualified medical expenses. An HSA trustee or custodian, or an employer who makes contributions to an employee's HSA, is not required to determine if the distributions are used exclusively for qualified medical expenses. If an individual dies with a balance remaining in an HSA, the account balance becomes the property of the person named in the HSA as the beneficiary of the account. If the individual named is the account beneficiary's surviving spouse, the HSA becomes the HSA of the surviving spouse. The surviving spouse is subject to income tax only to the extent distributions from the HSA are not used as qualified medical expenses. If the HSA passes to a person other than the surviving spouse, the HSA ceases to be an HSA as of the date of the death of the account owner, and the person receiving the HSA is required to include the value of the HSA in gross income, but reduced by any payments from the HSA made for the deceased owner's qualified medical expenses if paid within one year after death.

F. Miscellaneous Rules

If an employer makes HSA contributions, the employer cannot discriminate in favor of certain employees and, therefore, must make available comparable contributions on behalf of all those employees who have comparable coverage under the high-deductible health plan. Contributions are considered comparable if they are either the same amount or same percentage of the deductible under the high-deductible health plan. An HSA can be offered as an option under a cafeteria plan so that an employee may elect to have amounts contributed as employer contributions to an HSA on a salary reduction basis. Employer contributions to an HSA must be reported on Form W-2. The IRS will release forms and instructions in the future as to how to report HSA contributions, deductions and distributions. HSA's are not subject to COBRA continuation coverage.

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Cost of Living Adjustments for Qualified Plans

By Anne D. Pouget

The IRS has announced the cost of living adjustments applicable to dollar limitations for pension plans and other qualified retirement plans effective as of January 1, 2004.

The Internal Revenue Code limits the dollar amounts of contributions and benefits permitted under qualified retirement plans. These limits are required to be adjusted annually for cost of living increases.

Defined Benefit Plans

The dollar amount of annual benefit allowed under a defined benefit plan has been increased from $160,000 to $165,000. If a participant separated from service prior to January 1, 2004, the limit is determined by their compensation limitation, as adjusted through 2003, multiplied by 1.0220.

Defined Contribution Plans

The dollar amount of annual contribution permitted under a defined contribution plan has been increased from $40,000 to $41,000.

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Changes Affecting Ohio Probate and Estate Administration

By Mark R. Reitz

Governor Bob Taft recently signed House Bill 51 amending various probate and estate administration statutes. The scheduled effective date is April 7, 2004.

Statute of Limitations on Claims

The most dramatic change is a reduction in the statutory time period for presenting a claim against an estate from 12 to 6 months. For decedents whose date of death is after April 7, 2004, Ohio Revised Code §2117.06, as amended, provides that "[a]ll claims shall be presented within 6 months after the death of the decedent. A claim not presented within 6 months after the death of the decedent shall be forever barred as to the parties."

Generally, claims are required to be presented in one of two ways. First, if an executor or administrator has been appointed and the estate is not "closed," a claim shall be presented: 1) to the executor/administrator in writing; 2) to the executor/administrator in writing and by filing a copy with the probate court; or 3) in a writing addressed and sent to the decedent, which is timely received by the executor or administrator. In the alternative, when the estate is closed (but the 6 month time period has not expired), a creditor shall present the claim, in writing, to the distributees of the estate who may share the liability for payment of the claim.

When a distribution of assets is made prior to the expiration of the 6 month time period, notice shall be provided to all distributees that they may be liable to the estate if a claim is timely presented prior to "closing" the estate. The distributees may also be liable to the claimant directly if the claim is presented after "closing" the estate but otherwise within the 6 month statute of limitation. Only a distributee who has received timely notice of a claim will have any liability (footnote 1).

Ohio Revised Code §2117.12 provides that in the event a claim is disallowed, an action (generally based on contract) must be commenced in a court of competent jurisdiction within 2 months after rejection.

The aforementioned changes were made to bring the claims statutes in line with Ohio law requiring that most probate estates (with assets less than $338,333.00) be concluded within 6 months of commencement. The scope and effect of the reduction of the claims period is yet to be seen. However, beneficiaries may still be liable for a decedent's debts when claims are timely presented to either the fiduciary or directly to the beneficiaries.

Spousal Waiver of Citation to Elect

The second change implemented by House Bill 51 is that a surviving spouse may now waive notice of the issuance of the citation to elect under or against the will. Previously, a surviving spouse was required to be served, by certified mail, a letter from the Probate Court explaining their rights as a spouse and that any applicable elections must be made within 5 months of the appointment of the fiduciary. Understandably, this "citation" was upsetting to many spouses who were still grieving the loss of a loved one and were forcibly reminded by the Court that some tough decisions remained to be made. By waiving issuance of the citation to elect, the spouse signs an acknowledgement that he/she has received a general description of their rights and does not need to be sent the citation by certified mail.

Certificate of Notice of Probate

The final substantive change of House Bill 51 is to clarify that, in estates where a fiduciary is not appointed (e.g., taking advantage of the Ohio release from administration statutes for small estates), the requisite "notice of probate of will" and "certificate of service of notice of probate" are filed within 2 months after formal admission of the will. Previous law was somewhat unclear about the timing of notice to be issued to beneficiaries of estates where there was no fiduciary formally appointed.

Conclusion

Each of the aforedescribed amendments was made with hopes of streamlining the probate process and bringing estate administration procedures in line with the substantive changes implemented by the Probate Reform Act of 2001.

1 Personal liability is limited to the lesser of 1) the amount the distributee received, reduced by amounts previously returned; or 2) the distributee's proportionate share of the claims finally allowed.

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2004 Retirement Plan Contribution Limits

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