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NewsNotes Lesli S. Laffie, J.D., LL.M.
HSAs
ITIN Program Revisions
From the IRS The IRS and Treasury have provided guidance on health savings accounts (HSAs) established under Sec. 223, as added by the Medicare Prescription Drug, Improvement, and Modernization Act of 2003, for tax years beginning after 2003. HSAs are designed to help individuals save for qualified medical and retiree health expenses. Tax-favored contributions may be made by, or on behalf of, eligible individuals; amounts in an HSA can be accumulated over time or distributed tax free to pay or reimburse qualified expenses. An HSA is a tax-exempt trust or custodial account established exclusively to pay qualified medical expenses of the account beneficiary who, for the months for which contributions are made to an HSA, is covered under a high-deductible health plan that satisfies certain requirements as to deductibles and out-of-pocket expenses. HSA funds can be used to cover health insurance deductibles and any co-payments for medical services, prescriptions or products; they can also be used to purchase both over-the-counter drugs and long-term care insurance and to pay health insurance premiums during any period of unemployment. However, distributions not used for qualified expenses will be taxable; a 10% penalty will be imposed to deter the use of an HSA for nonmedical purposes. HSA contributions may be made by: 1. An individual and family members, even if the individual does not itemize deductions; 2. An individuals employer (contributions are not taxed to either the employer or the employee); and 3. Employees who participate in cafeteria plans, through a salary reduction plan. HSA distributions are not subject to tax if used to pay qualifying medical expenses. To encourage saving for health expenses after retirement, HSA owners between age 55 and 65 can make additional catch-up contributions ($500 for 2004). By 2009, an additional $1,000 can be added to the HSA. Notice 2004-2 contains guidance, in question-and-answer format, explaining what HSAs are, who can have them, how to create them and the basic rules for contributions and withdrawals. The notice clarifies the following:
The IRS requests comments on the rules, as follows: 1. The appropriate standard for preventive care in Sec. 223(c)(2)(C). 2. The relationship between Sec. 223 and the rules governing health flexible savings accounts (FSAs) in Sec. 125 cafeteria plans and proposed and final regulations (in particular, Prop. Regs. Sec. 1.125-2, Q&A-7). 3. Whether transition relief should be provided in cases of inappropriate coordination of a high-deductible health plan with other coverage. 4. The relationship between HSAs and health FSAs or reimbursement arrangements. 5. The application of the Sec. 125 nondiscrimination rules to HSAs offered under a cafeteria plan. 6. The corrective procedures when employer contributions exceed the statutory contribution limits. 7. The relationship between limits on out-of-pocket expenses in Sec. 223(c)(2)(A) and reasonable lifetime maximums on benefits in health insurance plans. Comments can be submitted electronically, to Notice.2004.2.Comments@irscounsel.treas.gov, or to:
In Notice 2004-1, the Service announced several steps to strengthen controls over the issuance of individual taxpayer identification numbers (ITINs), to help ensure that ITINs are issued for their intended purpose and not for other reasons (such as providing personal identification). In addition, the IRS is taking steps to help ensure that applicants can continue to obtain ITINs without undue burden. New ITIN applicants must use revised Form W-7, Individual Taxpayer Identification Number Application, and provide proof that the ITIN will be used for tax administration pur-poses. For applicants seeking an ITIN to file a return, the return must be filed along with the W-7. The IRS will implement the following changes, effective immediately: 1. All new ITIN applicants will have to show a Federal tax purpose for seeking an ITIN. Those seeking an ITIN to meet their income tax filing obligations must attach a Federal tax return to the Form W-7 when filing. 2. ITIN applications without proof of need for tax administration purposes will be rejected. 3. The IRS will reduce to 13 from 40 the number of documents it will accept as proof of identity to obtain an ITIN. The 13 acceptable documents are listed in the new Form W-7 instructions. 4. The IRS will change the appearance of the ITIN from a card to an authorization letter, to avoid any possible similarities with a Social Security number card. The IRS will continue to review ways to improve Form W-7 and will conduct a public comment period until June 15, 2004. Additional information is available on the IRS website at www.irs.gov, as is a list of frequently asked questions.
Regulations New temporary regulations (TD 9100; NPRM REG-116664-01) are designed to eliminate regulatory impediments to the electronic filing of certain income tax returns and other forms by corporations, partnerships and other businesses. The IRS has identified a number of regulations that impeded businesses ability to file returns electronically. For example, some regulations hinder electronic filing by requiring taxpayers to include third-party signatures on returns or to attach documents or statements generated by a third party. Others require taxpayers to sign IRS forms and file them as attachments to their tax returns. The temporary regulations, which eliminate the hurdles for tax years beginning after 2002 and apply for a three-year period, affect business taxpayers that must file any of the following forms: 1. Form 926, Return by a U.S. Transferor of Property to a Foreign Corporation. 2. Form 972, Consent of Shareholder to Include Specific Amount in Gross Income. 3. Form 973, Corporation Claim for Deduction for Consent Dividends. 4. Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness (and Section 1082 Basis Adjustment). 5. Form 1120, U.S. Corporation Income Tax Return. 6. Form 1120S, U.S. Income Tax Return for an S Corporation. 7. Form 5471, Information Return of U.S. Persons With Respect To Certain Foreign Corporations. 8. Form 5712-A, Election and Veri-fication of the Cost Sharing or Profit Split Method Under Section 936(h)(5). 9. Form 8832, Entity Classification Election. The text of the temporary regulations also serves as the text of a notice of proposed rulemaking. Comments and requests for a public hearing on the proposals must be submitted by March 18, 2004, either electronically at www.irs.gov/regs, or to:
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