TIR 07-4: Issues Concerning the Tax Relief and Health Care Act of 2006
On December 20, 2006, the President signed into law the Tax Relief and Health Care Act of 2006, Public Law 109-432 (“Act”), which extends and modifies many federal tax provisions. This Technical Information Release (“TIR”) announces the Massachusetts personal income tax treatment of the major federal personal income tax provisions contained in the Act, and is not an exhaustive list of the Act’s provisions.
For personal income tax purposes Massachusetts does not adopt the federal extensions of the deductions for qualified tuition expenses, contributions to Archer medical savings accounts (“Archer MSAs”) and certain expenses of elementary and secondary school teachers (“teachers’ expense deduction”). This TIR also announces that for personal income tax purposes Massachusetts adopts the changes to health care savings accounts (“HSAs”) including provisions allowing rollovers into HSAs from individual retirement accounts (“IRAs”), health flexible savings accounts (“Health FSAs”) and health reimbursement accounts (“HRAs”).
I. Qualified Tuition Deduction
Under section 222 of the Internal Revenue Code (“Code”), an individual is allowed a deduction for qualified tuition and related expenses for higher education paid by the individual during the taxable year. For personal income tax purposes, Massachusetts generally follows the provisions of the Code as of January 1, 2005, with certain exceptions. M.G.L. c. 62, § 1(c). Under the January 1, 2005 Code, this deduction was due to expire for tax years beginning after December 31, 2005. While the Act extends the tuition deduction for two years, through December 31, 2007,
Massachusetts does not adopt this extension since it was enacted into the Code after January 1, 2005.
Note that Massachusetts continues to allow its own college tuition deduction for tuition payments paid by the taxpayer, on behalf of the taxpayer or the taxpayer’s dependent, to a qualifying two- or four-year college leading to an undergraduate or associate’s degree, diploma or certificate. See TIR 97-13, Personal Income Tax College Tuition Deduction, for more information.
II. Contributions to Archer MSAs
Archer MSAs are tax-exempt trusts or custodial accounts to which tax-deductible contributions may be made by individuals with a high deductible health plan. IRC, § 220. In addition, employer contributions made on behalf of the employee are excludable from the employee’s gross income. IRC, § 220. The number of taxpayers benefiting annually from an Archer MSA contribution is limited to approximately 750,000 taxpayers. As of the date of the Act, the number of Archer MSAs had not reached the above referenced maximum threshold.
For personal income tax purposes, Massachusetts generally follows the provisions of the Code as of January 1, 2005, with certain exceptions. M.G.L. c. 62, § 1(c). Under the January 1, 2005 Code, the Archer MSA provisions contained a sunset date of December 31, 2005 that grandfathered in prior participants. The provisions provided that after December 31, 2005, contributions were allowed “…by or on behalf of individuals who previously made (or had made on their behalf) Archer MSA contributions and employees who are employed by a participating employer.”
The Act extends the Archer MSA provisions for two years, through December 31, 2007, thereby allowing employers and employees to establish and contribute to new MSAs in 2006 and 2007.
Massachusetts will not adopt the extension provisions relating to establishing and contributing to Archer MSAs established after December 31, 2005 since they were enacted into the Code after January 1, 2005. Therefore, neither the employee’s deduction nor the exclusion from the employee’s gross income for any employer contributions on behalf of the employee will be adopted for Massachusetts personal income tax purposes, unless such contributions fall within the prior participants exception as discussed above for Archer MSAs established prior to January 1, 2006. In addition, Massachusetts does not adopt the federal exclusions for income accruing in Archer MSAs established after December 31, 2005, though distributions from such accounts will not be included in Massachusetts gross income.
III. Teachers’ Expense Deduction
Under section 62(a)(2) of the Code, eligible educators are allowed a maximum deduction of $250 for qualified expenses (e.g., books, supplies, computer equipment). For personal income tax purposes, Massachusetts generally follows the provisions of the Code as of January 1, 2005, with certain exceptions. M.G.L. c. 62, § 1(c). Under the January 1, 2005 Code, this deduction was due to expire for tax years beginning after December 31, 2005. While the Act extends the teachers’ expense deduction for two years, through December 31, 2007, Massachusetts does not adopt this extension since it was enacted into the Code after January 1, 2005.
IV. Health Savings Accounts
For personal income tax purposes, Massachusetts generally follows the provisions of the Code as of January 1, 2005, with certain exceptions. M.G.L. c. 62, § 1(c). One of the exceptions is Code section 223 which contains the provisions governing health savings accounts. Id. In addition, many of the provisions governing retirement plans are also included within the enumerated exceptions. Massachusetts follows the provisions of Code section 223 as amended and in effect for the taxable year, and therefore will adopt the Code 223 provisions under the Act. The new provisions are summarized as follows:
A. Rollovers from Health Flexible Savings Accounts and Health Reimbursement Accounts into Health Savings Accounts
Employers may choose to reimburse the medical expenses of their employees by establishing either health flexible savings accounts or health reimbursement accounts. The Act contains provisions allowing a one-time distribution from either type of arrangement (Health FSAs or HRAs) to be rolled over into an health savings account, subject to a few limitations such as the maximum allowed rollover contribution being the lesser of the balance in the health flexible savings account or health reimbursement account as of September 21, 2006 or the date of the distribution.
B. Repeal of Annual Plan Deductible Limitation on Health Savings Account Contributions
Under prior law, the maximum annual aggregate contribution to an HSA was the lesser of (1) the amount of the annual deductible for the health plan or (2) the maximum permitted deduction as adjusted for inflation. Beginning for tax years after December 31, 2006, the Act removes the annual plan deductible limitation. Therefore, the 2007 maximum annual aggregate contribution is $2,850 for self-only coverage and $5,650 for family coverage. Rev. Proc. 2006-53.
C. Earlier Indexing of Cost of Living Adjustments
For tax years beginning after December 31, 2007, the Consumer Price Index for a calendar year is determined as of the close of the 12-month period ending March 31st for purposes of making cost-of-living adjustments for HSA provisions. Under prior law, the 12-month period ended on August 31st.
D. Expand Contribution Limitation for Part-Year Coverage
For tax years beginning after December 31, 2006, the Act allows individuals who become eligible for an HSA in a month other than January to make the full deductible HSA contribution for the year. The individual is treated as having been eligible during every month during the taxable year for purposes of computing the amount that may be contributed to the HSA.
E. One-Time Rollovers from IRAs to Health Savings Accounts
For tax years beginning after December 31, 2006, the Act allows a direct trustee-to-trustee transfer from an IRA to an HSA. The amount that can be distributed from the IRA and contributed to the HSA is limited to the otherwise maximum deductible contribution amount to the HSA. Only one such rollover from an IRA to an HSA is allowed during the lifetime of the individual.
Commissioner of Revenue
March 1, 2007
See, Joint Committee on Taxation Staff’s Technical Explanation of the “Tax Relief and Health Care Act of 2006,” As Introduced In The House On December 7, 2006, JCX-50-06, Dec. 7, 2006 (Title I, section 17).
Although Massachusetts has a specific provision which states that “… no tax shall be imposed … upon any stock bonus, pension or profit-sharing trust qualifying under [§ 401] of the Code or any [IRA] qualifying under [§ 408] of the Code,” Archer MSAs are enacted under § 220 of the Code and do not qualify as trusts, plans or accounts under § 401 or § 408 of the Code.
M.G.L. c. 62, § 1(c) was amended, effective April 12, 2006, by St. 2006, c. 58, § 10, An Act Promoting Access to Affordable, Quality, Accountable Health Care, by adding Code § 223 to the Code sections adopted as amended and in effect for the taxable year.
M.G.L. c. 62, § 1(c) (“Code”… as amended and in effect for the taxable year…sections…401 through 420…but excluding sections 402A and 408(q)).
Tax Relief and Health Care Act of 2006, P.L. 109-482, Section 302, adding new subsection (e) to IRC § 106 and adding new clause (iii) to subparagraph (B) of IRC § 223(c)(1).
Id., Section 303, amending paragraph (2) of IRC § 223(b).
Id., Section 304, amending paragraph (1) of IRC § 223(g).
Id., Section 305, amending subsection (b) of IRC § 223.
Id., Section 307, adding new paragraph (9) to subsection (d) of IRC § 408 and amending IRC § 223(b)(4).