Day Rettig Martin, P.C. welcomes Erica L. Yoder as an Associate Attorney with the firm.

Erica spent more than 14 years as in-house counsel for a large, publicly traded insurance company and 2 ½ years as in-house counsel for a holding company specializing in government contracts and turn around management before opening her own firm in 2017.  She brings with her a great deal of experience within the business world.  She has a BA degree from Central College, in Pella, Iowa, an MA from Purdue University, and received her JD from the University of Iowa.  Growing up active in 4-H and living on a farm in rural Iowa County, Iowa, Erica brings an awareness of farm issues and a strong desire to assist rural clients.  Her practice includes business formation and transactions, regulatory compliance, debt/creditor matters, bankruptcy, and estate planning.

Earlier this week, Day Rettig Martin, P.C. was the target of a sophisticated fraud scam that attempted to swindle over $150,000 from the firm. A man identifying himself as Charles Gomez contacted our firm through our website seeking legal services. Upon initial contact, he represented that his former employer, Cardinal Health, had wrongfully terminated him in retaliation for reporting wrongful conduct. He further represented that the employer had entered into a severance agreement with him, but had failed to make payment.  Our firm assigned an attorney to the matter, and the attorney corresponded with Mr. Gomez and a person identified as a representative of Cardinal Health.  The “representative” conceded that the funds were owed, and a few days later the firm received a Fed Ex package with a cashier’s check for the amount that was claimed to be owed pursuant to the written Severance Agreement that Mr. Gomez had provided to us. Immediately after confirming receipt of the check, Mr. Gomez requested the money be wire transferred to a bank account in Mexico. The immediate turnaround of the funds was outside of the firm’s procedures and the attorneys contacted the issuing credit union located in Texas to determine the status of the cashier’s check. The credit union confirmed our suspicions that it had not issued the cashier’s check and would not honor it.

Our firm contacted various federal agencies to report the fraud scam and notified representatives of Cardinal Health. We learned from Cardinal Health that this scam using its name has been running for nearly 2 years. Cardinal Health stated that it is aware of 45 instances of this scam perpetrated nationwide.

This scam was different from other publicized scams in that it did not have the overt “red flags.” Many of the common red flags such as grammar and spelling issues in emails, emails being sent at odd times of the night and morning, and avoidance of providing personal information were absent from our correspondence in this instance. The severance document had the appearance of an actual confidential document, and the e-mail purported to have been sent by the representative of Cardinal Health initially appeared legitimate. Finally, the cashier’s check appeared to be legitimate and the credit union was a legitimate credit union in San Antonio, Texas.

Upon review of the files, we noticed that although the email correspondence appeared to originate from Cardinal Health, the actual domain was “cardinalheathinc.” The Fed Ex package’s “sent address” matched the West Des Moines, Iowa office of Cardinal Health; however, on future investigation it was determined that the packet was sent from Boston. We were able to confirm listings for both the Cardinal Health representative and the purported “client.” Their information was available online.

Our experience shows that law firms are not immune from the efforts of scammers. It is important to remain vigilant for scams, especially in this digital age where it is common for firms to never meet out of state clients. We suggest that everyone, including law firms, remain vigilant. Importantly, while law firms want to assist their clients and turnover funds in a timely manner, they need to verify that they have received “collected funds” prior to disbursing any payment. This is our firm’s first experience receiving what turned out to be a fraudulent “cashier’s check.” We normally consider cashier’s checks to be “collected funds.” Based on this experience we will verify all cashier’s checks in the future as a matter of course.

The Setting Every Community Up for Retirement Enhancement (“SECURE”) Act passed the House of Representatives in May of 2019 with bipartisan support.  It was recently included in a 2020 appropriations bill that is anticipated to pass this week.

This proposed bill provides some benefits.  It expands Section 529 education savings accounts to include such categories as apprenticeships and homeschooling expenses; expands multiple-employer plan arrangement for those outside of the trade associations and professional organizations; and increases the small-employer retirement plan startup cost credit.   This will make it much easier for small businesses to offer retirement plans to their employees.  The rest of the article will focus on IRA’s.  Keep in mind that the IRA required minimum distribution rules discussed below also generally apply to all defined contribution plans (e.g., 401(k), profit-sharing, and 403(b) plans).   Let’s start with the good news first.

Repeal of the Maximum Age to Contribute

Currently, an individual may only contribute to a traditional IRA for years in which he or she has compensation and will not attain the age of 70.5 before the end of the tax year.  The SECURE Act would eliminate any age limit on the ability to contribute to a traditional IRA.  People are living longer and work past age 70.  They might as well be afforded the tax benefits afforded to everyone else as long as they are working.  This does not affect Roth IRA’s since there has never been an age limit to contribute to a Roth IRA.

Increases the Age for Required Minimum Distributions from 70.5 to 72

An IRA owner must begin taking Required Minimum Distributions by his “Required Beginning Date.” This is the later of the calendar year in which the plan participant retires, or April 1^st of the calendar year in which the individual reaches age 70.5.  If the account owner had not reached the age of 70.5 at the time of his death, the surviving spouse beneficiary may defer taking Required Minimum Distributions until such time as the deceased account owner would have reached age 70.5.  The SECURE Act would increase the age for taking Required Minimum Distributions to 72.  Again, this would make sense to have the retirement age triggers associated with these laws expand along with the participants’ increased lifespans.  This does not affect Roth IRA’s either since there is no Required Minimum Distribution which must be taken while the Roth IRA owner is still alive.

Now we get to the bad.  In short, it eliminates stretch IRA’s.  One commenter summed it up as “changing the rules of the game in the eight inning.”

Repeals the Stretch Feature for Most Inherited IRA’s

As the law currently stands, how distributions are distributed depends on the beneficiary’s relationship to the deceased and whether the participant died before or after his Required Beginning Date.

              If the Spouse is the Beneficiary

There are three options if the spouse is the designated beneficiary and the IRA owner died before the Required Beginning Date:  1)-The surviving spouse can elect to treat the IRA as the surviving spouse’s own IRA and defer distributions until his or her Required Beginning Date arrives.  2)-The surviving spouse can treat the IRA as an inherited one and take distributions over the surviving spouse’s life expectancy. This would defer distributions until the year in which the deceased IRA owner would have reached 70.5.  3)-Elect the 5-year rule in which the entire IRA balance must be distributed no later than December 31^st of the 5^th year after the IRA owner died.

There are two options if the spouse is the beneficiary and the IRA owner dies after the Required Beginning Date.  1)-Just as before, the surviving spouse can treat the IRA as the surviving spouse’s own.  2)-The surviving spouse can treat the IRA as an inherited one but must take distributions over the longer of the surviving spouse’s life expectancy or the deceased IRA owner’s life expectancy.

            If a Non-Spouse is the Beneficiary

Distributions are handled differently if the deceased lists a non-spouse as the beneficiary.  Treatment for this category depends on whether the IRA owner died before or after the Required Beginning Date.  If before the Required Beginning Date, the non-spouse beneficiary can take distributions over his/her life expectancy.  Additionally, the beneficiary may elect the 5-year rule.  If after the Required Beginning Date, the non-spouse beneficiary must take distributions over the life expectancy of the younger of the beneficiary or the deceased IRA owner.  If there are multiple designated beneficiaries, distributions will be taken over the oldest beneficiary’s life expectancy.  It is prudent to split the IRA into multiple accounts if there is a large gap in age between the beneficiaries. This allows the younger beneficiary/beneficiaries to stretch their portion of the IRA over the course of their individual lives and not the life of the oldest beneficiary.

Since there are no Required Beginning Date for a Roth IRA, the post-death minimum distribution rules will always be applied as though the Roth IRA owner died before his Required Beginning Date, regardless of when he dies.  Thus, the 5-year rule would be applied.

Comparing the Current System to the SECURE Act

The current system permits traditional IRA owners to pass on large parts of their estates in a tax efficient manner to their beneficiaries.  The beneficiaries may “stretch out” the distributions over a long period of time. This allows the distributions to be taxed at lower income rates.  A lump sum distribution or installments over a period of 5 years may be appealing to some, but the potentially large amounts of distributions could be taxed at higher ordinary income rates.

The SECURE Act would require inherited IRA’s to be distributed in full within 10 years of the plan participant’s death.  This rule would apply whether or not the plan owner died before or after his/her Required Beginning Date.  There are some notable exceptions to this otherwise termination of the ability to stretch out distributions from IRA’s.  The rules already in effect for surviving spouses would still apply.  A child of the plan owner who has not reached the age of majority would be exempt from the 10-year rule to a certain extent.  Once the child reaches majority, he/she shall cease to be an “Eligible Designated Beneficiary”, and the remaining amount shall be distributed within 10 years.  Other Eligible Designated Beneficiaries include disabled individuals that meet the definition of I.R.C. § 72(m)(7) and chronically ill individuals under the definition of I.R.C. §7702(B)(c)(2).

Updating Estate Plan in Anticipation of Eliminating the Stretch IRA

The elimination of the ability of those who inherit IRA to spread the tax impact over a long time period has one practical impact: making Roth IRAs more appealing.  The distributions from Roth IRAs are not taxed since the contributions were from after-tax income.  Thus, the aforementioned adverse consequences for beneficiaries of the 10-year rule wouldn’t affect the designated beneficiaries of Roth IRAs in any way.  If you are a young contributor hoping to transfer more of your retirement account to your beneficiaries and less to the government, it may be prudent to start contributing to a Roth IRA.  Contribution limits are $6,000, or $7,000 for those 50 years or older.

The only possible limitation would be if you make too much money.  In 2020 for single taxpayers, allowable contributions to Roth IRAs are reduced if income reaches $124,000.  No contribution is allowed if income exceeds $139,000.  This limit increases to $196,000 for married filing jointly taxpayers and is completely phased out once income exceeds $206,000.  However, high-income earners may utilize a “backdoor” Roth IRA.  Since traditional IRAs don’t have income limits for contributions, individuals can fund a traditional IRA with nondeductible contributions. They can then convert the account into a Roth IRA.

Choosing The Right IRA for You

Your intended beneficiaries will thank you for funding your IRA through the Roth approach.  The situation gets trickier for those that have already contributing large sums of money in their IRA accounts thinking their non-spouse beneficiary would be able to stretch out distributions for a long time.  However, there are a couple of strategies to maximize the effectiveness of your estate plan strategy in anticipation of the SECURE Act.

First, you should consider the income tax brackets of beneficiaries.  Consider designating IRA beneficiaries as those who typically fall into lower-income brackets to minimize overall tax liability.  If one has both a traditional IRA and a Roth IRA, consider leaving the traditional IRA to a lower-income beneficiary. You could then leave the Roth IRA to a high-income beneficiary.  For example, if the original plan was to provide for a child and his family but that child has since grown up and has a retirement plan of his own, consider naming a grandchild as the beneficiary.  The grandchild would still be subject to the 10-year rule, but the grandchild would presumably be taxed at a lower rate.

Roth IRA Conversions

Next, consider doing a Roth IRA conversion.  The amount being converted is included in the IRA owner’s gross income in the year of conversion and taxed at the ordinary income rate. If you are a business owner or farmer, there are ways to reduce your taxable income in the year in which you choose to do the conversion in order to not take a large tax hit.  For example, farmers may utilize section 179 on capital expenditures in order to create a farming loss in the year of the conversion.  However, now may be a good time to bite the bullet and do a large conversion.  The federal income tax rates may the lowest they will ever be.  President Trump’s Tax Cuts and Jobs Act changed the individual income tax brackets and rates to effectively lower taxes at the ordinary income level.

An alternative to doing one, large IRA to Roth IRA conversion is to do a series of conversions.  The advantages of doing so are illustrated by an example taken from a MarketWatch article which shows that a hypothetical single person with taxable income of $110,000 converting a $100,000 traditional IRA into a Roth IRA would cause about half the extra income from the conversion to be taxed at 32%.  However, spreading the $100,000 conversion over two years would permit the income from the conversion to be taxed at a lower rate.  This effectiveness of the multi-year conversion strategy can be even further bolstered by converting over many years when taxable income is lower. This could perhaps be done during a 5-10-year period after retirement.

Concluding Thoughts

Another option is to distribute tax-free RMDs directly to a charity, which is known as a Qualified Charitable Distribution.  Alternatively, life insurance policies could be purchased with IRA distributions. These could then be held in trust and paid out over a longer period of time.

The SECURE Act may be beneficial to retirees and include other provisions designed to make retirement accounts more inclusive for those employed by small employers.  However, as is often the case with major legislation, the good comes with the bad.  The Act should not be welcomed by non-spouse beneficiaries.  Contact the attorneys at Day Rettig Martin, P.C. to discuss modifying your estate plan strategy or creating one to efficiently pass your retirement accounts to the next generation.

 

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.