Archive for the 'Health Savings Accounts (HSAs)' Category

Mergers and Acquisitions – Don’t Ignore ERISA Employee Benefit Plans

November 18th, 2008

Generally, there are two different ways that companies can grow their existing businesses – 1) obtaining new customers (organic growth) or 2) merging with or acquiring another company.  Many companies attempt to grow through mergers and acquisitions (“M&A”) as it can allow for the rapid growth of a company’s client base and/or business capabilities.  However, M&As can pose numerous legal challenges to businesses.  One of the most often overlooked area in any M&A deal is employee benefits plans.

During a M&A deal, companies generally perform due diligence across all areas of the target company to identify issues that need to be addressed during the negotiation phase of the deal.  If employee benefits plans are not included in this due diligence, an acquiring company can discover that it has inadvertently become the owner of significant employee benefits plan problems.  While problems that arise in the area of employee benefits plans do not generally become “deal breakers”, ensuring that any and all benefits issues are identified and addressed before the final agreement is signed can avoid major headaches in the future.

Benefit plan issues can vary depending on the type of deal that is being contemplated – either an asset purchase or a stock purchase.  In an asset purchase, the due diligence required for employee benefits plans could be reduced if the agreement does not include the buyer assuming liability for employee benefit plans.  However, even in that situation, due diligence on the benefit plans should still be conducted to ensure that the buyer has a complete picture of the seller’s business.

In a stock purchase deal, or in an asset purchase deal where the buyer is assuming liability for benefit plans, the buyer needs to ensure that significant due diligence is conducted on the existing benefit plans.  Generally, this due diligence should include:

  • Identifying all employee benefit plans, programs and practices currently in existence – both formal written plans and informal, unwritten plans.
  • Obtaining all pertinent documents for each plan identified (e.g., plan documents, summary plan descriptions, Form 5500s, annual nondiscrimination testing and audits, determination letters, third party administrator contracts).
  • Reviewing all documentation to ensure the plans are currently compliant with applicable laws and looking for potential problem areas (e.g., accelerated vesting on change of control, unfunded liabilities, funding arrangements for nonqualified deferred compensation plans).
  • Requesting disclosure on currently pending or threatened claims based on benefit plans and on whether any governmental audits have been commenced or are pending.
  • Identifying potential problems to be addressed during negotiation of the deal.

As stated earlier, issues identified during the due diligence process for employee benefits plans are generally not severe enough to stop a deal from closing.  However, if properly addressed during the negotiation phase, they can be factored in with all the other components in the decision making process.  Where these issues are not properly addressed, they can become a significant concern for the buyer after the deal has completed. 

Benefits counsel can assist in completing comprehensive due diligence of a target company’s benefit plans to ensure that the acquiring company does not get blind-sided by benefit issues in the future.  Please contact our office for additional information or to talk to an attorney about your particular situation.

The Internal Revenue Service (IRS) Issues Health Savings Account (HSA) Distribution and Contribution Guidance – Notice 2008-51 & Notice 2008-52

June 5th, 2008

On June 4, 2008, the IRS released Notices 2008-51 and 2008-52, which provide guidance for HSAs.  Generally, Notice 2008-51 applies to the treatment of qualified HSA funding distributions and Notice 2008-52 applies to contributions to HSAs.  Each Notice is discussed in further detail below.

Notice 2008-51

Notice 2008-51 provides guidance on a qualified HSA funding distribution from an IRA or Roth IRA to a HSA, effective for taxable years beginning after December 31, 2006.  The notice states that the qualified HSA funding distribution is a one-time transfer from an individual’s IRA or Roth IRA to that individual’s HSA.  Generally, it is excluded from gross income and not subject to the 10% additional tax for early distributions.  The IRA distribution is counted against the maximum annual HSA contribution for the taxable year of the distribution and is subject to the §408(d)(9)(D) testing period rules.  Distributions from both traditional IRAs and Roth IRAs are allowed, however, distributions from “ongoing” SEP or SIMPLE IRAs do not qualify.

The qualified HSA funding distribution must be less than or equal to the maximum annual HSA contribution, based on the individual’s age as of the end of the taxable year and the type of high deductible health plan (HDHP) coverage at the time of distribution.  Only one IRA distribution for contribution to a HSA is permitted during an individual’s lifetime, with one exception.  If the IRA distribution occurs when the individual has self-only HDHP coverage and later in the same taxable year the individual has family HDHP coverage, a second qualified distribution is allowed in that taxable year.  The normal HSA contribution rules do not apply to qualified funding distributions.  A qualified HSA funding distribution relates to the taxable year in which it is actually made, and it must be a direct transfer from an IRA to a HSA. 

The amount of the qualified HSA funding distribution is excluded from gross income and the 10% penalty tax does not apply provided the individual remains eligible during the entire testing period.  The testing period starts with the month the contribution is made to the HSA and ends on the last day of the 12th month following the start month.  If an individual ceases to be eligible, the qualified distribution is included in gross income in the taxable year in which the individual first fails to be eligible, and the 10% additional tax applies unless the failure is due to death or disability. 

If a distribution from a HSA is not used for qualified medical expenses, that amount is included in income and subject to the 10% additional tax, regardless of whether the contribution includes the qualified HSA funding distribution.

Notice 2008-52

Notice 2008-52 provides guidance on the annual contribution limit to HSAs, effective for tax years beginning after December 31, 2006.  This notice provides that an individual who is an eligible individual on the first day of the last month of the taxable year (December 1 for calendar year) as having been an eligible individual for the entire year and therefore may make a full contribution for the year.  However, a testing period does apply to this full contribution rule.

The testing period starts with the month the contribution is made to the HSA and ends on the last day of the 12th month following the start month.  If an individual ceases to be an eligible individual during the testing period, a portion of the contributions will be included in gross income and subject to the additional 10% tax.  This includable amount is the amount of the contributions attributable to months preceding the month in which the individual was not an eligible individual (which could have not have been made but for the provision).  It is includible for the taxable year of the first day of the testing period that the individual was not eligible.  However, an exception applies if the individual ceases to be eligible due to death or disability.

Those that wish to take advantage of these new rules, should ensure they have a thorough understanding of the requirements.  Both IRS Notices contain examples which illustrate the rules provided in the notices.  For additional information on how this new HSA guidance could impact your plans, please contact our office.

2009 Health Savings Account (HSA) Contribution Limits Announced by the IRS

May 21st, 2008

The IRS released Revenue Procedure 2008-29 on May 13th.  This Revenue Procedure details the 2009 inflation adjusted amounts allowed for Health Savings Accounts under Internal Revenue (Code) Section 223(g).  

For calendar year 2009, the annual limitation on deductions is:

  • $3,000 for self-only coverage, or
  • $5,950 for family coverage

HSAs are used in conjunction with High Deductible Health Plans (HDHPs) which are defined under Code Section 223(c)(2)(A).  For the 2009 calendar year, a HDHP is defined as a health plan with:

  • An annual deductible that is not less than:
    • $1,150 for self-only coverage, or
    • $2,300 for family coverage, and
  • Annual out-of-pocket expenses (including deductibles, co-payments and other amounts not including premiums) that do not exceed:
    • $5,800 for self-only coverage, or
    • $11,600 for family coverage

Additionally, the catch-up contribution for those individuals over age 55 is $1,000.  If both spouses are over 55 the catch-up contribution is $2,000.

HSAs have become increasingly popular for individuals and employers as a way to plan for and control healthcare costs.  The numbers of individuals covered under these health plans – High Deductible Health Plans with Health Reimbursement Arrangements – has rapidly increased.  The Government Accountability Office in Washington estimates that 4.5 million people were covered under HSAs in 2007 as opposed to an estimate of a little over 400,000 in 2004.