Hsa and IRA—the basics

1. Hsa and IRA—the basics By James mcguire, Associate General Counsel KNOWLEDGE. CLARITY. RELIABILITY. www.compliancealliance.com (888) 353-3933

2. Overview • HSAs • Description • Setting Up the Account • Closing and Transferring HSAs • IRAs • Description • Setting Up • Closing and Transferring IRAs • Common Issues and Wrap-Up

3. disclaimers • Only a broad overview • Not meant to constitute legal or tax/accounting advice • Contact your attorney or accountant for more detailed inquiries, and prior to setting up these accounts • Won’t be addressing live questions, but feel free to send any follow-up questions you have to our Hotline (hotline@compliancealliance.com).

4. HSAs and IRAs in general • Accounts tied to employment • The former is for medical expenses; the latter is for retirement • Basics are not that complicated, but specifics can get VERY complicated • Increased interest in these products from our members

5. Health savings accounts (HSAs) • Just what are HSAs? • Accounts that allow individuals to save their own money to cover health insurance costs • Set up with a designated custodian (qualified HSA trustee)…banks automatically qualify • Tied to a high-deductible health plan, typically offered through an employer • Use of funds for designated medical expenses ONLY • “No permission or authorization from the IRS is necessary to establish an HSA.” – Pub. 969 • Deposits are tax-deductible • Can work for different employers (or even no job at all!) • Not discussing other types of health savings (Archer MSAs, FSAs, etc.)

6. Setting up the hsa • Savings or checking account? • No requirement to pick one or the other (HSA is a tax designation) • Checking accounts are more common • No restriction on whether account is interest-bearing • Make sure your customer is aware of pros and cons for whatever option they end up choosing

7. Setting up the hsa • Titling the account • No official (federal) rules on how it should be styled • Can just be the name of the accountholder • No prohibition on titling as “Health Savings Account f/b/o [name of accountholder]” or something similar • BUT keep state law in mind

8. Setting up the hsa • IRS Documentation • W-9 (they must provide TIN, but don’t have to sign) • 5305C—model form • 1099-SA (distributions) • 5498-SA (contributions) • Check to make sure they do have a “High Deductible Health Plan” that qualifies under the IRS rules. • Other documentation • TISA • But no Reg E

9. Setting up the hsa • Rollovers • What is a rollover, exactly? • Time limit in which funds must be deposited (within 60 days, typically only 1 per year) • HSA to HSA rollovers (direct rollovers) unlimited per year • Contributions • Must be made in cash (can’t be stocks/bonds/notes/property etc.) • Limited to $3,350 for a single person, $6,750 for a family plan (2016); deadline is 4/18 of next yr. • Employers/others can contribute • NOT bank’s responsibility to monitor excess contributions

10. Closing/transferring HSAs • How to close out “properly”—just like any other account • Rolling over / transferring to another institution • Death of accountholder • If spouse named as beneficiary, becomes HSA of the spouse • If someone other than spouse named, taxable in the year of death • Should be a beneficiary named—but if not a beneficiary, becomes the business of the estate

11. Hsacommon concerns • Maintaining the account • Just look out for suspicious activity (SARs) • Use of debit cards • CANNOT let accounts overdraw • Restriction to medical expenses only • You may monitor “prohibited transactions” for records purposes (but not your responsibility)

12. Investment retirement accounts • Just what is an IRA? • Many different types of “IRAs” (individual retirement annuities, mutual fund IRAs, etc.) • Limited here to discussing Individual Retirement Accounts, mainly those set up as certificates of deposit (CDs). • Like HSAs, a tax designation…not an actual product! • Account set up to save money for retirement • Roth vs. traditional IRA • Self-directed IRA vs. employer-sponsored (ERISA) IRA • For the most part, we’re ONLY discussing self-directed traditional IRAS.

13. Setting up the ira • Titling the account • Like with HSAs, the door is open (It’s the “wild west”) • Different options…different opinions • Some feel that in order to obtain proper FDIC insurance coverage, must include the beneficiary’s name in the titling of the CD…no evidence in 12 CFR §330.14 that that is the case. • Identity of the accountholder • Must be a natural person (CANNOT be a trust!) • SIMPLE IRAs & SEP IRAs

14. Setting up the IRA • IRS documentation • W-9 (consider for account opener AND beneficiaries) • Form 5305-A (traditional); 5305-RA (Roth)—model forms • Form 5498 to beneficiaries…Annual IRA Contribution Information • Deadline to file a correct document is May 31 of the year after the taxable year • Required disclosures • TISA Disclosures • 26 CFR §1.408-6 • Always recommend setting up through your wealth management or trust division, if you have one • This is an IRS/treasury reg and NOT a banking reg, so make sure to run by your tax professional or CPA prior to proceeding

15. Setting up the ira • Rollovers—receiving funds from a previous account • Difference between “rollovers” and “transfers” • Transfers • No ‘1 per year’ rule for transfers • Can transfer from a traditional IRA to a Roth, but not the other way around • Rollovers • Bank gives funds to account holder, account holder reinvests funds (60 day time limit) • Same account rollovers • “You can withdraw, tax free, all or part of the assets from one traditional IRA if you reinvest them within 60 days in the same or another traditional IRA.”

16. Closing/transferring an ira • Transferring to another institution • Closing an account or withdrawing funds “early” • 10% add-on tax for withdrawals prior to 59 ½ • Same year withdrawals generally tax-free…but can get messy

17. IRA Common Concerns • Maintaining the account/duties as custodian • Pretty sparse • Annual IRS forms • Just make sure nobody takes the money (and monitor early distributions taken, etc.) • Withdrawal within first 7 days of account • IRS rules state they have to get all their money back • Special exception in Regulation D for IRAs (12 CFR §204.2(c)(1)(i) footnote 1) • Estate issues—HUGE!

18. Ira concerns—estate issues • “Beneficiary”—what is that? • “A beneficiary can be any person or entity the owner chooses to receive the benefits of the IRA after he or she dies.” IRS Pub 590-B • Person officially designated in the IRA agreement • NOT the person designated in a will or other testamentary document • A trust can be “named” as a beneficiary, but cannot be “designated” as a beneficiary • ??? • Highly discourage this, unless you have a rockstar team of CPAs and tax/estate attorneys at the ready

19. IRA Concerns—Estate issues • Death with a beneficiary • Spouse Beneficiary has three choices • Treat as their own IRA (change themselves to account owner) • Roll over into their own IRA • Treat themselves as a beneficiary • Usually fairly hassle free…just make sure beneficiary is aware of their options and chooses correctly! • Non-spouse beneficiary must treat themselves as beneficiary to an “inherited IRA” (can’t contribute or roll over into their own account…though can do a transfer to another trustee)

20. IRA Concerns—Estate issues • Death without a beneficiary • This is the nightmare scenario everyone should dread • Typically will require rolling over the funds into a beneficiary IRA • Lots of ‘moving parts’ and deadlines for this, so if no designated beneficiary, contact your tax professional/accountant immediately upon learning of the customer’s death • May want to consider proactive steps, like an audit of all IRAs on file to make sure they currently have valid/living designated beneficiaries • Also can handle contingencies through your account-opening agreement with the customer

21. IRA concerns—other issues • Divorce/ QDROs –obtain a copy of the order • Child support levies—attachable? Yes! • Exceeding contribution limits ($5,500/$6,500 for “catch-ups” 50 or older); 6% tax • Opening an IRA after 70 ½ (yes for a Roth, no for a traditional IRA) • To alleviate estate concerns, always a good idea to “check in” with accountholder (at least annually) to make sure they’re still around • Fiduciary rule • **You don’t have to open an HSA or IRA if you don’t want to**

22. Overall wrap-up • HSAs and IRAs seemingly are becoming more popular • General concept easy to understand, but the specifics are difficult • When in doubt, always call your tax attorney/CPA!

23. HSA/IRA resources • IRS Pub. 969 (HSAs); 590A and 590B (IRAs) • IRA FAQ: https://www.irs.gov/retirement-plans/retirement-plans-faqs-regarding-iras • SIMPLE IRAs https://www.irs.gov/retirement-plans/plan-sponsor/simple-ira-plan • SEP IRAs https://www.irs.gov/retirement-plans/choosing-a-retirement-plan-sep • No longer an IRS telephone numbers for individual offices…but can call general helpline, chat with them, or contact your tax professional for further information.

24. Questions? Thank you for your participation! We hope you found value in today’s presentation. If you have any additional questions, contact Compliance Alliance at 888-353-3933 or via e-mail at hotline@compliancealliance.com .