investment management and fiduciary services insight

- January 2005 -

What Banks Need to Know About Establishing Health Savings Accounts

By William Campbell Ries, Esq. and Michelle L. Kopnski, Esq.

Health Savings Accounts (HSAs) provide banks with a unique opportunity to offer some of their traditional products and services to a new customer base. Banks are uniquely qualified to offer HSAs because they are the primary provider of the products and services needed to establish this new product for their wholesale and retail customers. Each bank can design a unique HSA to meet its particular objectives and capabilities.

Health Savings Accounts (“HSAs) were created under the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 and are described in § 223 of the Internal Revenue Code of 1986, as amended. HSAs are successors to the Archer Medical Savings Accounts created in 1997. As with retirement plans, the use of HSAs will enable employers to limit employee health care costs by controlling the amount the employer pays for health insurance coverage. HSAs are similar to individual retirement accounts (“IRA”).

In order to qualify to use an HSA, the employer must purchase a high deductible health care plan (“High Deductible Plan”). Generally, the High Deductible Plan must have a minimum deductible of $1,000 and a maximum deductible of $5,000. Once the deductible is satisfied, the insurance company pays the balance of any covered medical expenses. Absent an HSA, the employee would be responsible for paying the expenses subject to the deductible with after-tax dollars. By using an HSA, the employer can make a pretax contribution to the HSA on behalf of the employee. The employee can also make contributions with pretax dollars. The amount in the HSA is used by the employee to pay medical expenses which are subject to the deductible. Any amounts not used may grow tax free and can be carried forward to future years. They can also be rolled over into other health savings accounts if the employee changes jobs.

ESTABLISHING AN HSA

HSAs can be established in two ways. The employer may “sponsor” an HSA by working with a bank, insurance company, and sometimes a third party administrator (“TPA”). The employer can arrange with the bank to establish HSAs for its employees. Each employee then opens an HSA with the sponsoring bank.

Employees, who are employed by employers with a High Deductible Plan, may also establish HSAs directly with a bank or other financial institution. The employees can do so irrespective of whether their employers have sponsored HSAs with another institution or have not
made any such arrangements at all. This is similar to the manner in which IRAs are established with financial institutions.

OPPORTUNITIES FOR BANKS

HSAs are particularly well suited to banks because most banks already offer the products and services needed for HSAs. Banks will need to collect both employer and employee contributions from the employer or from the employee’s payroll account and transfer those contributions to each employee’s HSA. The HSA will consist of two accounts: a transaction account and an investment account. The transaction account will hold the initial contribution and will be used to pay the medical expenses which are subject to the deductibles on the High Deductible Plan. To facilitate payment of the deductibles, the bank can offer a debit card, a checking account, and/or a direct billing feature through a TPA.

The investment account would work much like an IRA. It can utilize deposit vehicles offered by the commercial bank, including money market accounts and certificates of deposit. It also can utilize investment vehicles offered by the bank’s trust department, including mutual funds, individual securities, annuities, and collective funds. The bank may provide these investment products directly or through third-party vendors.

It is important to note that the earnings on the contributions to an HSA grow tax-free in HSAs. Whatever amount is not used to pay deductibles remains in the investment account. These accounts increase in value over the years to the extent that the amounts deposited in such accounts are not used. For example, younger employees may need to utilize only a very small portion of their accounts for medical expenses. Any amounts not used remain in their HSAs for later use. Generally, any distributions made other than to pay the deductible (qualified medical expense) will be taxable to the employee at the time of distribution and will be subject to a 10 percent excise tax.

Banks are in the catbird seat because they already offer the products and services necessary to provide HSAs to their customers. HSAs present banks with the opportunity to offer their standard bank products including direct deposit, checking and savings accounts, debit cards, credit cards and other investment products. These products can be designed to accommodate an individual bank’s objectives and capabilities. Banks can offer these products to their corporate customers, i.e., employers, and also to their retail customers, i.e., employees. Banks should become familiar with the requirements for offering HSAs and be in a position to move forward as soon as possible. It is important that banks design their HSA product to include the services which that bank wishes to offer. This includes having the HSA contract drafted in such a manner as to best serve your customers and to protect the bank from liability.

We would be pleased to meet with you to discuss how your bank can take advantage of this unique opportunity to offer HSAs and to assist you in designing your HSA product. This is the time to move forward to take advantage of this new opportunity.

William Campbell Ries is Chair of the firm’s Investment Management & Fiduciary Services Practice. Michelle Kopnksi is an attorney in the firm’s Business and Finance Department. For further information, please contact Bill at 412.594.5646 or wries@tuckerlaw.com or Michelle at 412.594.5522 or mkopnski@tuckerlaw.com.

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Governmental Plans, Roth IRAs Eligible To Participate In Group Trusts

By William Campbell Ries, Esq.

Pension, profit-sharing, stock bonus and other trusts which are exempt from taxation under Section 401(a) of the Internal Revenue Code may be invested in collective investment funds (“group trusts”) established pursuant to Regulation 9.18(a)(2) of the Office of the Comptroller of the Currency (“OCC”). Such group trusts are exempt from federal income tax pursuant to Revenue Ruling 81-100 which establishes five criteria which must be satisfied. If this Revenue Ruling is satisfied, the group trust is not subject to taxation.

Recently, the Internal Revenue Service (“IRS”) released Revenue Ruling 2004-67 which now expressly permits government retirement plans established pursuant to Section 457 of the Internal Revenue Code (the “Code”) to participate in a group trust established under 9.18(a)(2). In addition, Roth IRAs established under Section 408(q) are also authorized to participate in such group trusts.

In order to participate, the following requirements, as set forth in Revenue Ruling 81-100, must be satisfied:

• The group trust must be adopted as a part of each participating plan or account.

• The group trust instrument must limit participation only to eligible accounts.

• The group trust must provide that it must be used for the exclusive benefit of the employees and their beneficiaries.

• The group trust must contain non-assignment language.

• The group trust must be created or organized in the United States and maintained as a domestic trust.

In order to take advantage of the new exemption to enable governmental plans and Roth IRAs to participate in bank collective funds, the plan documents may need to be amended to include the new eligibility requirements. The new Revenue Ruling will enable trust departments to maintain exempt trusts in a more cost-effective manner by including them in their collective funds.

William Campbell Ries is Chair of the firm’s Investment Management & Fiduciary Services Practice. For more information on this topic, please contact Bill at 412.594.5646 or via e-mail a wries@tuckerlaw.com.

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New Pennsylvania State Legislation
 

The Pennsylvania legislature passed and the Governor signed several key pieces of legislation in late November that will have wide-ranging impact.

Death During Divorce. A number of provisions alter property distributions when a person dies while party to a divorce proceeding, but prior to the entry of a divorce decree. The estate of a person who dies before a divorce decree has been entered, but after grounds for divorce have been established under the statute, is not distributed under the provisions of the probate statutes. When one spouse dies, the rights and obligations of the divorcing spouses are determined under the domestic relations laws, specifically the equitable division of marital property laws, instead of under the probate laws, which formerly provided for an elective share of a spouse of one-third of the decedent’s assets subject to the election. If the person dies after the effective date of the Act, the Act applies, and whether the divorce proceeding was filed before, on, or after that effective date is immaterial. (Senate Bill 95, now Act No. 175)

Support for Families of the Disabled. The Family Support for Persons with Disabilities Act provides for a pilot program, to be instituted by the Department of Public Welfare, to support families who want to keep disabled family members in their homes instead of institutions. The program is intended to be family centered and family directed, with the family and, to the extent appropriate, the disabled individual, deciding what services are most important to that family. Assistance to the families may include cash advances, cash reimbursements, and vouchers, among other things. The pilot program will likely be started in one area of the state and then expanded to other areas. (House Bill 2270)

The Governor also VETOED several notable pieces of legislation:

Health Care Agents, Living Wills, and DNR Orders. Senate Bill 492 would have provided specific guidance for health care powers of attorney, living wills, and out-of-hospital “do not resuscitate” orders. The Bill clarified when each document would be operative and elaborated on when health care providers could rely on such documents and how they were to be executed and revoked. The Bill also provided for a situation where no health care agent had been appointed in a health care power of attorney by setting forth a hierarchy of persons entitled to make health care decisions on a patient’s behalf when he was unable to make or communicate decisions for himself.

Priority of Claims Against Decedents’ Estates. Senate Bill 304 would have improved the standing of the Commonwealth in recovering from insolvent estates. First, the Commonwealth’s recovery for Medical Assistance services provided to a decedent would have been given a greater priority and would have been placed on par with the funeral director, other medical providers, and the decedent’s employees in collecting from an insolvent estate. Second, the other claims of the Commonwealth and its political subdivisions would have been given a greater priority than other general claims.

Increase in the Family Exemption. Senate Bill 304 would also have increased the family exemption from $3,500 to $5,000 and expanded the relatives eligible to collect the family exemption to include children and parents of the decedent who were not members of the decedent’s household.

Payments to Family and Funeral Directors. Finally, Senate Bill 304 would have permitted the use of a decedent’s deposit account valued at up to $5,000 (up from $3,500) to pay for, or reimburse a family member for, funeral services. It also would have permitted the use of up to $5,000 (up from $3,500) of a patient’s care account to be used to pay for the decedent’s burial expenses and up to a total of $5,500 (up from $4,000), when added to the payments for burial expenses, of a patient’s care account to be paid to the spouse, child, parent, or sibling of the decedent. In either case the payments could be made with or without the appointment of a personal representative for the decedent.

 

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USA Patriot Act Examination Procedures

By William Campbell Ries, Esq.

The major bank regulators have released examination procedures pursuant to Section 326 of the Patriot Act (“Procedures”) to assist financial institutions with the implementation and compliance with those procedures. That section requires that banks establish policies and procedures to identify new customers when they open accounts. It also requires financial institutions to establish a customer identification program as part of its Anti-Money Laundering Compliance Program.

The bank must formulate a risk assessment of its customer base and its products, including a review of account types, account opening methods and types of identification required. The rules apply to new customer accounts which is defined as “a formal banking relationship to provide or engage in services, dealings, or other financial transactions and includes a deposit account, transaction or asset account, a credit account or other extension of credit.” Employee benefit accounts governed by the Employee Retirement Income Security Act of 1974 (“ERISA”) are excluded from the definition. Corporations and municipalities are also excluded from the rule. At a minimum the name, date of birth, address and an identification number must be obtained when the account is opened. The Procedures state that “a bank need not establish the accuracy of every element of identifying information obtained but it must verify enough information to form a reasonable belief that it knows the true identity of the customer.”

The Procedures apply to trust accounts. It is more difficult to determine who the customer is in trust accounts because of the unique way they are established. Under the Procedures, the customer is the person who opens the new account. In the case of a trust, the customer would be the trust. The bank will not be required to look through the account to the beneficiaries but rather to the individual who creates the trust. This would also be the case with respect to a guardian account. The customer would be the person who acts on behalf of the person who lacks capacity. Under the rule it is not necessary that the customer already have a taxpayer identification number at the time they open the account. It is sufficient that the customer has applied for a taxpayer identification number.

We would be pleased to assist you in drafting your procedure or in reviewing them prior to the examination. It is important that each bank develop a detailed customer identification program for its trust department so that it can withstand the scrutiny of a bank examination. Because of the complexity of trust department accounts, there are numerous questions which must be answered in order to comply with the provisions of Section 326.

William Campbell Ries is Chair of the firm’s Investment Management & Fiduciary Services Practice. For more information on this topic, please contact Bill at 412.594.5646 or via e-mail a wries@tuckerlaw.com.

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High Court To Decide Whether IRAs Are Exempt From Bankruptcy Estate

 

The U.S. Supreme Court has agreed to consider whether, and to what extent, individual retirement accounts (IRAs) are exempt from an individual debtor’s bankruptcy estate. Rousey v. Jacoway, U.S., No. 03-1407, cert. granted 6/7/04.

Currently, there is a major split in circuit courts as to whether or not IRAs should be exempt. This split was highlighted by the Court of Appeals for the Eighth Circuit when it held that the two IRAs held by a married couple were not exempt from their bankruptcy estate. The Appeals Court noted that while their decision was following Eighth Circuit precedent, four other Circuit Courts have previously held that IRAs are exempt.

The confusion stems from the Bankruptcy Code Section 522(d)(10)(E), which provides that payments from an investment plan are exempt only if they are received (1) pursuant to a pension, annuity or similar plan or contract; (2) are on account of illness, disability, death, age, or length of service; and (3) are reasonably necessary for the debtor’s support or for the support of a dependent of debtor. There is an argument that has been made that IRAs are a “similar plan or contract,” but the Court of Appeals for the Eighth Circuit did not buy it. The Court of Appeals reasoned that had the IRS intended IRAs to be exempt, it would have included it within the statutory language of “pension, annuity or similar plan or contract.”

On the other hand, U.S. Courts of Appeals for the Second, Fifth, Sixth and Ninth Circuits have all held that IRAs do fall within Section 522(d)(10)(E). The debtors in Rousey argued that IRAs are to be included within Section 522(d)(10)(E) because the same section, 522(d)(10)(E)(iii), denies exemptions to certain plans, without denying the exemption to IRAs. The U.S. Court of Appeals for the Third Circuit has held that IRAs are exempt only where the debtor has reached the statutory age where they may withdraw their funds. Any IRAs held by debtors under the statutory age are not exempt.

Against that backdrop, the U.S. Supreme Court is set to decide which Circuit Court has interpreted Section 522(d)(10)(E) correctly. This decision is sure to have a large impact on the area of personal bankruptcy law. We will update you with any new information in the next issue of this newsletter.

 

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Bank Secrecy Procedures

By William Campell Ries, Esq.

All federally insured banks are required to maintain “procedures reasonably designed to assure and monitor the compliance of such depository institutions” with respect to the Bank Secrecy Act, the Foreign Transactions Reporting Act, and Regulation H of the Federal Reserve Board. These policies and procedures must include customer due diligence practices, a fraud detection program, internal control environment, management oversight and responses to law enforcement and regulatory requests. Each examination conducted by a federal banking agency must include a review of such policies and procedures. If in the exam it is determined that the insured institution has failed to establish and maintain such procedures, or has failed to correct any problem with the procedures, then “the agency shall issue an order . . . to cease and desist from its violation.” This provision is mandatory and requires that if a violation occurs, the banking agency is required to issue the order. In addition, the Federal Reserve Board recently imposed a civil money penalty of $10 Million in addition to issuing a cease and desist order on one bank for its failure to maintain adequate policies and procedures as required.

Bank secrecy and money laundering have become a hot button item for bank regulatory agencies. Banks should review their procedures to ensure that they satisfy applicable laws and regulations in order to prevent mandatory sanctions by bank regulators. Please contact a member of the Investment Management and Fiduciary Services Group if you desire assistance in reviewing your policies and procedures covering bank secrecy and money laundering.

William Campbell Ries is Chair of the firm’s Investment Management & Fiduciary Services Practice. For further information, please contact Bill at (412) 594-5646 or via e-mail at wries@tuckerlaw.com.

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Status of Common Law Marriage in Pennsylvania

By Joni L. Landy, Esq.

On September 17, 2003, the Pennsylvania Commonwealth Court decided in a worker’s compensation case that the doctrine of common law marriage was abolished prospectively. However, it was not clear that the decision had any impact beyond the specific case. This firm advised clients that common law marriage was likely still valid after September 17, 2003.

Change in Pennsylvania Statutory Law

The Pennsylvania Legislature recently passed a statute that states as follows:

“No common law marriage, contracted after January 1, 2005, shall be valid. Nothing in this part shall be deemed or taken to render any common-law marriage, otherwise lawful and contracted on or before January 1, 2005 invalid.”

Accordingly, it is now clear that no common law marriage entered into in Pennsylvania after January 1, 2005 will be valid.

Current State of the Law

• Any common law marriage entered into Pennsylvania after January 1, 2005 is invalid.

• Any common law marriage entered into in Pennsylvania prior to September 17, 2003 is valid.

• Any common law marriage that was entered into in Pennsylvania from September 17, 2003 through January 1, 2005 is likely valid, but could be disputed by a party (participant, spouse or beneficiary) seeking to oppose the marriage.

Pennsylvania was one of the few remaining states in the nation that permitted common law marriages in recent years. At least going forward, it will now be clear that such marriages entered after January 1, 2005 are invalid and will not be recognized for employee benefit or any other purpose.

For more information on this topic or any other employee benefits issues, contact Joni Landy at 412.594.3945 or via e-mail at jlandy@tuckerlaw.com or any other Tucker Arensberg lawyer with whom you regularly work.