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1 Saving for a Rainy Day: Non-ERISA Pre-Tax Plans Elizabeth Allen U.S. Department of Labor Scott Gates Office of the State Treasurer, State of Kansas Fran Wolf Unclaimed Property Recovery & Reporting, LLC UPPO Presentation Disclaimer Use of the Unclaimed Property Professionals Organization, Inc., (UPPO) name or copyrighted materials in this presentation does not constitute an endorsement by UPPO of a member, vendor, product or service. The content represents the opinions of the author and not necessarily those of UPPO. This information is not intended as legal advice and should not be used to replace the advice of legal counsel. UPPO Antitrust UPPO has a policy of strict compliance with federal antitrust laws. UPPO members and/or meeting attendees cannot come to understandings, make agreements, or otherwise concur on positions or activities that in any way tend to raise, lower or stabilize prices or fees. Members and/or attendees can discuss pricing models, methods, systems, and applications, as well as certain cost matters that do not lead to an agreement or consensus on prices or fees to be charged. However, there can be no discussion as to what constitutes a reasonable, fair or appropriate price or fee to charge for any service or product. Information may be presented with regard to historical pricing activities so long as such information is general in nature and does not include data on current prices or fees being charged in any trade area. Any discussion of current or future prices, fees, discounting, and other terms and conditions of sale, which may lead to an agreement or consensus on prices or fees to be charged, is strictly prohibited. 1

2 CPE Credit CPE credit is available at this conference. However, NASBArules require proof you attended the sessions. For UPPO to provide verification of attendance, you MUSTbe scanned in ANDout of each session to be eligible to receive credit(s). Please see the room monitor(s) at the back of room to have your name badge scanned. ERISA Covered Plans Title I of ERISA applies to Employee Benefit Plans Generally, ERISA Section 3(3) Defines Employee Benefit Plans. Employee Welfare Benefit Plan defined under Section 3(1) Any plan, fund, or program Established or maintained By an employer/employer organization or an employee organization or both Which provides any benefit listed in Section 3(1) to participants or their beneficiaries through insurance or otherwise ERISA Covered Plans Employee Pension Benefit Plan defined under Section 3(2) Any plan, fund, or program Established or maintained By an employer/employer association or by an employee organization or both Which provides retirement income or which results in deferral of income for employees until termination of employment or beyond. 2

3 Pre-Tax Savings Plan Non-ERISA pre-tax savings plans: Payroll Deductions (Includes 529s) Regs (a) (2) IRAs Regs (d) HSAs??? Generally non-erisa plans. However, there are requirements to avoid becoming subject to ERISA. Keeping HSA s Non-ERISA To avoid ERISA regs, the HSA must meet the following four basic requirements 1. The program must be completely voluntary 2. An employer cannot endorse the program, but can administrate payroll functions and publicize the program 3. An employer may only receive reasonable compensation for payroll expenses 4. An employer can make no contributions (unless circumstances below) Keeping HSA s Non-ERISA (con t) To make employer contributions and still keep the HSA non-erisa covered: Establishment of the HSA must be completely voluntary The employer cannot make or influence HSA fund investment decisions The employer cannot receive any compensation in connection with the HSA NO conditions can be placed on the utilization of HSA funds beyond that permitted by the Code The employer must allow the employee to move funds to another HSA The employer cannot represent that the HSAs are established or maintained by the employer 3

4 Unclaimed property & 529's 1995 Uniform Act adopted by 15 states: AL, AR, AZ, HI, IN, KS, LA, MI, ME, MT, NM, NC, NV, VT, WV Section 2(a)(14) applies to IRA s and other account or plan that is qualified for tax deferral under the income tax laws of the U.S. Three years after the earlier of either: A distribution or attempted distribution the date of the required distribution as stated in the plan or trust agreement governing the plan. most 529 s do not have a limiting age AL, IL pre-paid, NV, TX and VA, 10 years after beneficiary reaches 18 Unclaimed Property & 529's 1981 Act enacted in 22 states and D.C.: AK, CO, FL, GA, ID, IA, MN, NH, NJ, ND, OK, OR, RI, SC, SD, TN, UT, VA, WA, WI, & WY The general rule for funds held by a fiduciary in Section 12(a) is five years after the owner has:» Increased or decreased the principal,» Accepted payment of principal or income,» Communicated concerning the property, or» Indicated an interest in the property in writing. Section 12(b) tolls the 5 year period until the mandatory distribution date for funds held in an IRA, SEPA or other similar plan established pursuant to the IRS code. not as broad as the 1995 act language. Unclaimed Property & 529's The problem. In states that use the 1981 Act, accounts become reportable in five years with no indication of an interest in the account by the account owner regardless of whether the 529 plan has received returned mail from the account owner. The grandparents who deposit $50,000 when the grandchild is born and set it and forget it in an agebased portfolio would find their assets sent to the states as unclaimed property after five years if they fail to respond to a due diligence letter. 4

5 529 specific provisions - where to report? The difference between prepaid plans and investment account plans. In addition to U.P. statutes, check the states 529 plan enabling statutes. Reversion to the trust usually for pre-paid plans or states that started with pre-paid and now have both Report to state of issuance as unclaimed property usually for savings accounts: Conflicts with Texas v. New Jerseystate of owner s last known address What is a Health Savings Account? Product creation / replacement of Archer MSAs A recent response to high deductible medical insurance plans Individually owned (different from Flex Spending Accounts, HRAs) Tax advantaged treatment Cash account & investment aspect Contributions can be made only when insured in a HD plan Funds roll over year after year Allowable distributions No mandatory distribution or trigger Can appoint beneficiary; treatment upon death of account holder Current treatment in UP Laws Why tax advantaged sections do not apply? Reliance on catch-all provisions What makes the account eligible? States have taken the position that UP rules apply to HSAs NAUPA adopted new codes, but adoption varies HS01 (Cash), HS02 (Investments), HS03 (Future expansion) Applicability provided for within most state handbooks 5

6 Reporting HSAs When to report from DLC, based on state dormancy Examples of unique state treatment: HSA Matrix Excerpt for 2014 Filing STATE NAUPA Code Dormancy Period Due Diligence Item Minimum Per Statute Report "Cut-Off" Date Report "As Of" Date FL HS01/HS02 5 $50 12/31/08 12/31/13 5/1/2014 MI HS01/SC16 3 $50 03/31/11 03/31/14 7/1/2014 PA AC01 & Note 5 N/A 12/31/08 12/31/13 4/15/2014 'HSA' in Report TX MS17/SC16 3 $250 03/01/11 03/01/14 7/1/2014 Report Due This information was created by Unclaimed Property Recovery and Reporting, LLC (UPRR) for reference only, and is not intended to be legal advice. UPRR encourages readers to consult with their legal advisors. Tax Reporting Pre escheatment, non qualifying distributions trigger required payment of taxes and 20% penalty Reported by holder to owner on IRS Form1099-SA At escheatment, guidance is less clear Post escheatment, when account holder claims funds, tax reporting is an issue Challenges and potential future treatment Uneven adoption of HSXX NAUPA codes Handling of mixed asset accounts varies What to do once assets leave specialized recordkeeping systems Tax payment and reporting 6

7 Suggested Solution - Add returned mail to 1995 Act (14) property in an individual retirement account, defined benefit plan, or other account or plan that is qualified for tax deferral under the income tax laws of the United States, three years after the earliest of: (a) the date of the distribution or attempted distribution of the property, or (b) the date of the required distribution as stated in the plan or trust agreement governing the plan, or the date, if determinable by the holder, specified in the income tax laws of the United States by which distribution of the property must begin in order to avoid a tax penalty; or (c) 20 years after the date of the second mailing of a statement of account or other notification or communication to the apparent owner was returned as undeliverable or after the holder discontinued mailings as required by federal law; 7