From the February 2007 issue of Investment Advisor • Subscribe!

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February 2007

The Tax Relief and Health Care Act (H.R. 6111), which passed the House and Senate in early December, is being hailed as a bill that will make health savings accounts (HSAs) more attractive to consumers. James Klein, president of the American Benefits Council (ABC) in Washington, notes that a highlight of the bill is an increase in the amount that employees and employers may contribute to their HSAs "to pay for current medical expenses and to save for their future healthcare needs." He says H.R. 6111 accomplishes this by eliminating the rule restricting annual contributions to the amount of the deductible for the high deductible health plan offered in combination with an HSA and applying, in its place, a higher limit which will be indexed each year. Also, he says, for the first time, employees who are hired mid-year will be able to enroll in HSAs right away.

Other beneficial provisions in H.R. 6111 cited by ABC include: permitting employers to make available a one-time opportunity for funds to be directly transferred on a tax-free basis from a flexible spending account (FSA) or health reimbursement arrangement (HRA) to an HSA; allowing employers to make higher contributions to the HSAs of their non-highly-compensated employees; offering individuals the opportunity for a one-time tax-free direct transfer of funds from an IRA to an HSA (up to the HSA annual contribution limit); and directing the U.S. Department of Treasury to publish annually indexed adjustments to HSA contribution limits and other plan features by June 1 each year. Together, ABC says, these provisions are estimated to result in $287 million reduction in federal revenues over five years and $1 billion over ten years. (For further information on the bill's provisions, go to the online table of contents for February 2007 at www.investmentadvisor.com or here.)

A recent survey conducted by The Scarborough Group (www.401kadvice.com) revealed that 401(k) participants would rather get advice from an advisor on their 401(k) plan than turn to the Internet for help. Scarborough, which provides allocation management for 401(k) participants in Annapolis, Maryland, polled 664 plan participants across the nation. Ninety percent of respondents admitted they "have been na??ve about investing," with 73% stating they are not "overconfident" in their investing abilities. Seventy-two percent said they'd turn to an advisor for help, while only 20% said they'd resort to Internet-based advice.

The Internal Revenue Service released December 21 its Notice 2007-6, which relates how the IRS will process determination letters for cash balance and other types of hybrid defined benefit pension plans and other guidance related to the new Pension Protection Act requirements for hybrid plans. According to the American Benefits Council (ABC) in Washington, a determination letter from the IRS states that at the time of review, a plan's design is "determined" to meet the qualification requirements set forth by the Internal Revenue Code. Meeting Code standards allows the plan to qualify for a number of tax-related benefits. According to ABC, in 1999, "the IRS froze its hybrid plan determination letter process for further review of the cash balance plan design and conversion procedures. Retirement plans can operate without a determination letter, however, employers prefer to administer their plans under the guidance of such a letter to confirm their designs fall within the letter of the law." Because the Pension Protection Act, signed into law last year, clearly confirmed the legitimacy of cash balance and other hybrid plans, the IRS is once again reviewing determination letter requests, ABC says.

The IRS notice describes how sponsors of traditional defined benefit plans should prepare to convert their plans to cash balance or other forms of hybrid plan designs based upon the provisions of the PPA.

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