According to a recent survey from Bank of America, only 11% of employees can name four of the distinguishing features of a health savings account (“HSA”).  The four HSA traits that employees don’t understand include the triple tax advantage; HSA funds can be invested; the assets are portable; and the high-deductible health plan eligibility requirement.

Triple Tax Advantage

HSAs offer three separate tax benefits.  Contributions are pre-tax, meaning the employee doesn’t pay taxes on the income received that goes into the HSA account.  This is similar in concept to a 401(k) or IRA.  Next, investment gains are tax-free.  Lastly, withdrawals for qualified medical expenses are not taxed.  In contrast, while a 401(k) or IRA offer pre-tax contributions and tax-free earnings, the withdrawals are taxed.  There is a penalty when withdrawals from an HSA account are made for nonqualified medical expenses.  However, once an individual reaches the age of 65, withdrawals can be made for nonmedical reasons without a penalty, but the amount would be treated as ordinary income for tax purposes.

Investing HSA Funds

HSA funds can be invested.  Early contributions to one’s HSA account at a young age can grow over time and provide funds for medical expenses which will likely be larger at an old age.

Portability of HSA Assets

HSA accounts are owned by the employee.  They stay with the individual and can be taken if the person changes jobs.  In contrast, Health Reimbursement Accounts (“HRA”) are funded exclusively by the employer.  Therefore, HRA accounts are not portable.

High-Deductible Health Plan Eligibility Requirement

To qualify, the employee must be on a high-deductible health insurance plan.  By definition this means having a deductible of at least $1,350 for individuals or $2,700 or more for families.  Additionally, out-of-pocket maximums can’t exceed $6,750 for individuals or $13,800 for families.  You know it’s a good deal when the government imposes restrictions on how much you can contribute.  Currently, the limits are set at $3,500 for individuals and $7,000 for families per year.  All of these figures are set to increase by $50 for individuals and $100 for families, respectively.

Please contact the attorneys at Day Rettig Martin, P.C. for assistance with your labor and employment law needs.

According to a study done by Forbes, the estimated average student loan balance of a 2017 college graduate is $28,650.  Most millennials are savvy enough now to understand the importance of investing for retirement early so as to take advantage of compound interest.  However, many have limited available funds early in their careers. This faces them with the conundrum of either investing or paying down student debt.  There has been much discussion recently in the Democratic debates about possible solutions.  Additionally, employers are attempting to assist and retain young workers in this tight labor market.

How Employers are Helping

Abbot Laboratories offers a very favorable benefit. They allow qualifying employees of the company’s 401(k) that contribute 2% of their eligible pay toward their student loans through payroll deductions to receive an employer match equal to 5% of their pay deposited into their 401(k).  A private letter ruling from the IRS, issued in August 2018, recognized for the first time this type of benefit. By the same token, other companies offer different types of student loan repayment programs.  A survey conducted by the International Foundation of Employee Benefit Plans showed 4% of organizations in the survey currently offer some type of student loan repayment assistance benefit. Additionally, 2% are in the process of implementing a program and 23% are considering a similar benefit in the future.

Furthermore, PwC started a program in September 2015 where it pays $100 per month towards a participating employee’s student debt.  An extra $100 per month for an employee with student debt of $31,000 planning on paying it off over 10 years at a 6% interest rate will help the employee save almost $11,000 in interest.  Correspondingly, the employee will be able to complete the obligation two years faster.

While an employer can provide up to $5,250 per year in tax-free employer-provided educational assistance, any student loan payments made by the employer will be treated as taxable income by the employee.  There currently is a bill in Congress called the Employer Participation in Repayment Act of 2019. If passed, this bill intends to allow employers to contribute up to $5,250 per year in student loan repayment assistance tax-free.

College costs continue to rise.  However, politicians, Congress, and employers recognize the problem and attempting to provide assistance.  In various ways, some plans may be more realistic than others.

July 15-16, 2019,  Attorney Ron Martin traveled to Indianapolis, Indiana, to attend the Association of Chapter Twelve Trustees Seminar.  During the Farm Crisis of the 1980’s, family farmers did not have efficient methods to reorganize using the Bankruptcy Code. Chapter 11 was simply too complex, and Chapter 13 was too limited. In 1986, Congress created Chapter 12  to help family farmers reorganize and restructure their debts and give them a “fighting chance” to stay on their land.  Chapter 12 was initially a temporary addition to the Bankruptcy Code; however, in 2005, it was made a permanent part of the Bankruptcy Code.

 

At this seminar, Ron attended sessions on topics such as: farm sales, tax considerations for Chapter 12, pre-bankruptcy planning, and more. He also was able to attend a seminar on updates to the Chapter 12 bankruptcy case law presented by Judge Diana Davis, former President of the Capital Region Bankruptcy Bar Association and the Capital Region Women’s Bar Association. Other seminars were also presented by forerunners in Chapter 12 bankruptcy.

 

Growing up on an Iowa farm, Ron Martin understands the difficulties presented to his Chapter 12 clients. He has focused his career on helping these individuals and continues to attend conferences such as this to be able to better help his clients. If you have any questions regarding debt restructuring or agricultural law matters, call Attorney Ron Martin.

Attorney John Sexton attended the Iowa State University Center for Agricultural Law and Taxation Summer Seminar on Agricultural Tax, Business & Transition Planning. Multiple attorneys spoke on the economic issues surrounding the agriculture community today. They also discussed how to best pass on family farm estates to future generations.

C Corporations for Family Farms

During the 1970s, Professor Neil Harl from Iowa State University advocated the creation of C corporations as the proper entity for farm operations. A great deal of experts now believe many of the advantages associated with incorporating in the 1970s are no longer prevalent today. Additionally, the double taxation feature of corporations results in an inefficient way to run the farm operations. Many clients now ask the question of whether it is possible to get out of the C corporation structure without incurring severe income tax consequences. The good news is that it is possible, but the bad news is that somebody must die.

Liquidating a C Corporation

What is the proper method of liquidating a C corporation farm? First: the farmer needs to convert the C corporation to an S corporation. Second: wait 5 years to avoid the built-in gains tax of IRC Section 1374. Third: wait for the death of a shareholder.

Ideally, all of the stock should be gifted to the parent with the shorter life expectancy. When that parent passes, the stock basis will get the stepped-up basis on the value of the farmland. The owner should now sell all assets of the corporation and liquidate the corporation in the same year as the parent’s death.

The estate (now the sole shareholder) recognizes capital gain of the amount of the value of the farmland at the time of death over the original basis amount. This gain also increases the basis of the stock which corresponds to the initial step up in basis for the value of the farmland. The corporation would then redeem the stock in liquidation. This would allow the estate to recognize a capital loss in the same amount as the initial capital gain. The beneficiaries would then receive the corporation’s land at the full stepped up basis.

Continuing the Family Farm

In the simplest form, the beneficiaries can divide the land equally and distribute it. Another option to consider is the parents can create a limited liability company. They would then distribute the membership interests to the children. The parents must take care in drafting the agreement if they wish to have certain family members continue to farm the land without the intervention of others.  The on-farm heir should be elected as the manager of the limited liability company. Removal of the manager would then require unanimous consent. The off-farm heirs would receive their portion as rental income.

I commonly see a lack of exit plans for the beneficiaries of a family farm corporation or limited liability company. The operating agreement needs to be detailed in describing triggering events and purchase price.

Our Experience

Farms have constantly continued to increase in size. This leaves the running of large farms under the purview of a C corporation or limited liability company to the children. Fiduciary duties arise out of these business entity structures. We have successfully brought derivative suits when minority shareholders are victims of breaches of fiduciary duties by directors and officers. Beneficiaries should be mindful they are still running a business even if it is just with family.

A recent Wall Street Journal article discussed the economic difficulties facing the typical family farmer today. The article said that farmers currently file for Chapter 12 bankruptcy protection at the highest levels in 10 years.  If you are a family farmer facing difficult financial situations, contact Attorney Ron Martin to discuss debt restructuring and Chapter 12 bankruptcy options.