Steven P. Leone Earns Certified Valuation Analyst Credential

Steven P. Leone, CPA - Ft Lauderdale CPAWest Palm Beach, Fla. – April 3, 2018  Templeton & Company is pleased to announce that Steven P. Leone, CPA, CVA, Managing Tax Partner, has successfully completed the certification process with the National Association of Certified Valuators and Analysts® (NACVA®) to earn the Certified Valuation Analyst® (CVA®) designation. The CVA designation is granted only to individuals who have met a high bar or both prerequisite qualifications and passed a substantive examination testing both understanding of theory and the application of skills in the field of private company business valuation.

“The CVA designation is an indication to the business, professional, and legal communities that the designee has met NACVA’s rigorous standards for professionalism, expertise, objectivity, and integrity in the field of performing business valuations, and the attendant financial consulting related to the discipline,” stated Parnell Black, MBA, CPA, CVA Chief Executive Officer of NACVA.

“NACVA’s CVA designation is the only valuation credential accredited by the National Commission for Certifying Agencies® (NCCA®), the accrediting body of the Institute for Credentialing Excellence™ (ICE™),” Black added.

Steve joined Templeton & Company in 2013. Prior to joining the firm, Steve worked with a Big 4 CPA firm for 18 years serving as the Managing Tax Partner working with clients in the information technology, financial services, retail, real estate, construction, communications, manufacturing and distribution, and entertainment industries.

About Templeton & Company

Founded in 1990, Templeton & Company, LLP is a professional services firm providing comprehensive business solutions to help its clients discover and realize their vision for success. Located in Fort Lauderdale and West Palm Beach, Fla., the firm provides consulting services to businesses in multiple industries with a focus on audit, tax, technology, accounting, succession strategy, and business valuations. Templeton & Company is also an independent member of the BDO Alliance USA, a national network of leading CPA firms. For more information about Templeton, its people, services, experience, and alliances, visit

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Gotta Get Away: Timeshares, Hotels and the Sharing Economy

By Kevin Riley

It’s a familiar tale: An entrepreneurial business model enters the real estate market, disrupting traditional players. Even now-ubiquitous chain hotels were once a disruptor and, in the 1970s, timeshare executives were the ones shaking up the hospitality market. Timeshares became such a competitive presence that every major hotel conglomerate entered the market and acquired existing, successful companies. Now, in the past few years, timeshare businesses have adapted to the digital age and rapidly diversified their offerings to appeal to a changing consumer base. Perhaps because of its entrepreneurial roots, the timeshare industry may be well-positioned to adapt and weather the market’s newest disruption: the sharing economy and the growth of online rental platforms offering an alternative—and in many cases, more affordable—hospitality experience.

The power is in the hands of the consumer. With an expanding pool of options available for consumers, vacation rental providers are jockeying for travelers’ dollars. Online platforms, such as HomeAway, and its subsidiary VRBO, offer consumers a different travel experience, with accommodations available at their fingertips. The flexibility these platforms provide has particularly resonated with millennials and anyone traveling on a budget.

Because the traditional timeshare model offers an alternative to purchasing a second home, rental platforms have impacted timeshares differently than hotels. Timeshare buyers have long had access to a variety of travel destinations without the hassle of upkeep and maintenance. Destination choices, however, have evolved. For the past 15 years, some timeshare operators have prioritized expanding into urban areas, including major hubs like New York City and Miami, as well as secondary urban markets gaining popularity as cultural destinations, like Boston, San Diego, Vancouver and New Orleans. And competition could get fiercer in those markets, particularly because many customers are swayed by the authentic travel experience online rental platforms can offer via homestays and other non-traditional arrangements.

In addition to providing greater exposure for smaller competitors, the secure automated payment processing capabilities of online rental platforms also removed a barrier to entry into the market for these smaller players. Companies with a modest supply of vacation rentals, for example, may not have had the ability to obtain a merchant account to enable online transactions. While online rental platforms charge a host service fee for each transaction, that fee is a much cheaper alternative to a merchant account and allows small players to offer a convenience on par with larger hotels and timeshare companies.

As a testament to its financial adaptability, the timeshare industry has seen prominent deal activity in 2016. In June, private equity investment firm Apollo Global acquired Diamond Resorts International Inc. Following suit of other major hotel conglomerates, this December, Hilton Worldwide Holdings’ board of directors approved the spinoff of its timeshare business, Hilton Grand Vacations, which represented 12 percent of their top line, and Park Hotels & Resorts, Inc. The spinoffs are expected to be finalized in early January 2017. Starwood Hotels and Resorts also completed the spinoff and sale of its timeshare business, Vistana Signature Experiences this year, before finalizing its merger with Marriott, in September. Because the hotel industry is an entirely different business than timeshares, with different multiples and earnings, spinning off timeshares into a separate public entity is a common strategy.

All signs point to sustained growth of the sharing economy in the coming years. Hotel owners and timeshare operators alike would be wise to develop agile service offerings and adaptable marketing strategies to prepare for disruptions on the horizon and secure their share of the market.

This article originally appeared in BDO USA, LLP’s “Construction Monitor Newsletter (Winter 2017). Copyright © 2017 BDO USA, LLP. All rights reserved.


Tax-Exempt Bond Compliance

By Marc Berger, CPA, JD, LLM

One of the benefits of tax exemption under Internal Revenue Code (IRC) Section 501(c)(3) is the ability to use tax-exempt financing. Tax-exempt bonds generally carry a lower interest rate than taxable bonds and the interest received by the bondholders is excludable from income for federal income tax purposes.

Because of these advantages, tax-exempt bonds are subject to strict federal tax requirements both at the time of issue and for as long as the bonds remain outstanding. The Internal Revenue Service (IRS) recognizes that all requirements are closely monitored and complied with at the time bonds are issued. Bond counsels for the organization, the issuing authority and the underwriter are all keenly focused on closing a clean transaction. However, problems can arise after closing, when all of the outside professionals have moved on to the next transaction.

In order to keep their tax-exempt bonds in compliance, organizations must actively monitor the use of proceeds and bond-financed property throughout the entire period that bonds remain outstanding. The IRS encourages organizations to adopt written procedures which go beyond reliance on the tax certificates included in bond documents. Written procedures should contain certain key characteristics, including:

  • Due diligence review at regular intervals;
  • Identifying the official or employee responsible for review;
  • Training of the responsible official/employee;
  • Retention of adequate records to substantiate compliance (e.g., records relating to expenditure of proceeds and use of facilities);
  • Procedures reasonably expected to identify noncompliance in a timely manner; and
  • Procedures ensuring that the issuer will take steps to correct noncompliance in a timely manner.

The goal of establishing and following written procedures is to identify and resolve noncompliance on a timely basis in order to preserve the preferential status of the bonds.

Ownership and Use of Property

All property financed with 501(c)(3) bonds must be owned by a 501(c)(3) organization or a governmental entity. For this purpose, a “governmental entity” includes a state or local governmental entity, but not a federal entity. In addition, use of bond-financed property in an unrelated trade or business or use by parties other than 501(c)(3) organizations is limited. This type of nonqualified use is known as private business use, or private use. In order to maintain its tax-exempt status, a 501(c)(3) bond issue may not have more than 5 percent private use over its lifetime. The 5 percent limit applies to a bond issue as a whole as opposed to each underlying project being financed. Additionally, the costs associated with a bond issue (e.g., counsel fees, underwriters’ discounts, financial advisory fees, accounting fees, rating agency fees) count toward the 5 percent private use limit. Depending on the size of a bond issue, costs of issuance may range from .5 to 2 percent of the bond issue. As a result, tracking private use becomes very important. The situations that can generate private use fall into the following categories:

  • Property sold or leased;
  • Property subject to management and service contracts;
  • Property involved in research activities; and
  • Property used in unrelated business activities.

While each of these situations results in private use, there is some potential relief from private use treatment. Bond-financed property that is sold to a non-501(c)(3) organization or governmental entity can be “remediated.” For example, if an organization’s sales proceeds are used to make qualifying capital expenditures, private use treatment can be avoided. In addition, there are safe harbors for certain management and services contracts as well as for certain research activities. If these safe harbors are met, then no private use will result. Proper planning in each of these situations can avoid exceeding the private use limit.

Section 501(c)(3) organizations with tax-exempt bonds should be tracking private use at regular intervals. This may involve working with an organization’s legal, facilities, contracting, real estate and finance departments. Schedule K of the Form 990, which must be completed by organizations with outstanding tax-exempt bonds, asks whether the organization has established written procedures to track compliance with all of the tax requirements – a question to which all organizations should be answering “yes.” The ability to issue tax-exempt bonds is a benefit that should not be taken for granted, and consistent post-issuance compliance will allow an organization to realize this benefit over many years.

This article originally appeared in BDO USA, LLP’s “Nonprofit Standard” newsletter (Fall 2015). Copyright © 2015 BDO USA, LLP. All rights reserved.

Federal Tax Day – IRS Provides Some Relief to Data Breach Victims

The IRS will not assert that an individual, whose personal information may have been compromised in a data breach, must include in gross income the value of identity protection services provided by the entity that experienced the data breach. In addition, the IRS will not assert that an employer, whose employees’ data may have been compromised in a data breach of the employer, must include the value of identity protection services in the employees’ gross income.

The announcement does not apply to cash received in lieu of identity protection services, or to identity protection services received for other reasons that a data breach, such as identity protection services received in connection with an employee’s compensation benefit package. The announcement also does not apply to proceeds received under an identity theft insurance policy.

Comments Requested

Comments are requested on whether organizations commonly provide identity protection services in situations other than as a result of a data breach, and whether additional guidance would be helpful in clarifying the tax treatment of the services provided in those situations. Comments should be submitted in writing on or before October 13, 2015, to: Internal Revenue Service CC:PA:LPD:PR (Announcement 2015-22) P.O. Box 7604 Ben Franklin Station Washington, D.C. 20044. Comments also may be sent electronically to “Announcement 2015-22” should be included in the subject line. All comments will be available for public inspection.

Federal Tax Day – IRS Issues Back to School Reminders

The IRS has issued back-to-school reminders for parents and students about education-related tax benefits, including the two college tax credits. In general, the American Opportunity Tax Credit or Lifetime Learning Credit are available to taxpayers who pay qualifying expenses for an eligible student. Eligible students include the taxpayer, spouse and dependents. The American Opportunity Tax Credit provides a credit for each eligible student, while the Lifetime Learning Credit provides a maximum credit per tax return. Although a taxpayer may qualify for both of these credits, only one can be claimed per student/per year. To claim these credits, the taxpayer must file Form 1040 or 1040A and complete Form 8863, Education Credits.

The credits apply to eligible students enrolled in an eligible college, university or vocational school, including both nonprofit and for-profit institutions. The credits are subject to income limits that could reduce the credit amount allowed on their tax return. Also, eligible parents and students can get the benefit of these credits during the year by filling out a new Form W-4, claiming additional withholding allowances, and giving it to their employer.

There are a variety of other education-related tax benefits including:

  • Scholarship and fellowship grants are generally tax-free if used to pay for tuition, required enrollment fees, books and other course materials, but taxable if used for room, board, research, travel or other expenses.
  • Student loan interest deduction of up to $2,500 per year.
  • Interest on savings bonds used to pay for college can be tax free in certain circumstances; income limits apply, and the bonds must have been purchased after 1989 by a taxpayer who, at time of purchase, was at least 24 years old.
  • Qualified tuition programs, also called 529 plans, are used by many families to prepay or save for a child’s college education.

In addition, taxpayers with qualifying children who are students up to age 24 may be able to claim a dependent exemption and the Earned Income Tax Credit.

U.S. IPOs to Maintain Pace Over Remainder of Year

Initial public offerings (IPOs) on U.S. exchanges finished the first half of the year with a flurry of activity. In fact, the 33 offerings that priced in June represent the highest number of deals since July of last year. Yet, despite this strong finish, the number of U.S. IPOs and proceeds raised through six months are down significantly when compared to 2014.*

According to the 2015 BDO IPO Halftime Report, a survey of capital markets executives at leading investment banks, IPO activity on U.S. exchanges during the second half of the year should mirror the first six months of 2015. A majority (54%) of bankers predict IPO activity will remain at the same level as the first half of the year. Just over a quarter (26%) anticipate the pace of U.S. IPO activity will increase in the second half of 2015, while one-fifth (20%) forecast a decrease in offering activity. Overall, capital market executives are predicting virtually no net change (under 1%) in the number of U.S. IPOs during the second half of the year.

Bankers anticipate these offerings will average just $174 million in size for the remainder of 2015, approximately the same as the first half of the year. This projects to less than $36 billion in total IPO proceeds on U.S. exchanges in 2015, the lowest level of proceeds since 2009 when the market was still reeling from the financial crisis.

“It was almost inevitable that the 2015 U.S. IPO market was going to experience a slowing of growth given the impressive increases achieved in 2013 and 2014, however the drop-off in offerings this year has been significant. While there are always multiple contributing factors for such a dramatic change, the capital markets community clearly believes the wide availability of private financing at favorable valuations is playing the leading role,” said Brian Eccleston, a partner in the Capital Markets Practice at BDO USA. “If this access to private funding continues, bankers believe it will lead to fewer IPOs moving forward. Certainly, this is a trend that bears watching.”

When compared to 2014, when 275 IPOs generated more than $85 billion in proceeds*, the number and size of U.S. IPOs have dropped considerably this year. A majority (56%) of capital markets executives believe the widespread availability of private funding at attractive valuations is the main factor in the dramatic drop in the number of initial public offerings (IPOs) on U.S. exchanges in 2015 when compared to 2014. A cooling stock market (22%), fewer offerings from private equity firms (14%) and the collapse of oil prices (8%) are cited as the main factor by much smaller proportions of the bankers.

When asked about the impact of companies putting off their IPOs due to the availability of late-stage financing in the private sector, a majority (61%) of the bankers feel it will lead to fewer offerings going forward, while more than a quarter (29%) predict it will result in better IPOs in the future. Two-thirds (66%) of the capital markets executives believe the recent trend of mutual fund companies investing in popular, private technology businesses is a further disincentive to companies considering an IPO.
In addition to the drop in the number of IPOs, the size of the average offering – even absent last year’s massive Alibaba offering – has decreased significantly in 2015. A large proportion of the capital markets community (41%) attribute the smaller average deal size to fewer large deals coming from private equity firms who have already exited many of their more mature businesses. Other factors cited by the bankers for the smaller sized offerings are increased investor risk tolerance for smaller offering businesses (32%) and valuation pressures forcing offering businesses to cut prices (21%). Only 6 percent attribute the decreased size to the JOBS Act encouraging smaller businesses to go public. Moving forward, capital markets executives anticipate that the size of the average IPO in the second half of the year will be $174 million, approximately the same as the first half.

*Renaissance Capital is the source of all historical data related to number and size of U.S. IPOs

This article originally appeared in BDO USA, LLP’s Quarterly Client Newsletter (Summer 2015). Copyright © 2015 BDO USA, LLP. All rights reserved.

Senate Appropriations Subcommittee Cuts IRS Budget

The Senate Appropriations Subcommittee on Financial Services and General Government on July 22nd approved a fiscal year (FY) 2016 IRS funding measure that provides $10.475 billion, a cut of $470 million, or 4 percent, below the FY 2015 enacted level. Appropriators said the decrease in funds would require the IRS to streamline its activities and prioritize available resources, including user fees, to perform core agency duties.

The House on June 17th approved $10.1-billion to fund the IRS for FY 2016, representing a cut of approximately $838 million, compared to FY 2015. The funding level was $2.8-billion below President Obama’s budget request (TAXDAY, 2015/06/12, C.1).

The bill requires $2.247 billion be spent on taxpayer services, roughly in line with the House appropriations, reflecting an increase of $90 million, which the panel said is intended to significantly improve the handling of identity theft cases and IRS response rates to telephone calls and correspondence from taxpayers. The funding level, however, is $162 million less than the president’s request.

During the most recent filing season, the IRS answered only 37 percent of taxpayer calls routed to customer service representatives, and the hold time for taxpayers who got through averaged 23 minutes. This is a sharp drop-off in service from the 2014 filing season, when the IRS answered 71 percent of its calls and hold times averaged about 14 minutes. The number of disconnected calls skyrocketed to about 8.8 million, up from about 544,000 in 2014, reflecting an increase of more than 1,500 percent.

For IRS enforcement measures, the Senate level of $4.5 billion is $360 million less than FY 2015 and $548 million less than the administration’s request. Appropriators also cut IRS operations support, making the Senate level of $170 million less than FY 2015 and $960 million less than the administration’s request. Business systems modernization fared no better, receiving a $30-million cut from the FY 2015 level and $119 million less than the president’s request.

In addition, the Senate subcommittee added provisions that they said would “ensure accountability and transparency” at the IRS. The bill includes:

  • A prohibition on funds for bonuses or to rehire former employees unless employee conduct and tax compliance is given consideration;
  • A prohibition on funds for the IRS to target groups for regulatory scrutiny based on their ideological beliefs;
  • A prohibition on funds for the IRS to target individuals for exercising their First Amendment rights; and
  • A prohibition on funds for the production of inappropriate videos and conferences.

IRS Dealt Major Setbacks

Taxpayers are having a hard time reaching the IRS on the phone and resolving issues.

Senate Finance Committee Chairman Orrin G. Hatch, R-Utah, and ranking member Ron Wyden, D-Ore., on August 5th released the committee’s investigative report detailing the probe into the IRS’s treatment of 501(c)(4) organizations applying for tax-exempt status. The report was delayed for more than a year after the IRS informed the committee that it had not been able to recover a large number of potentially responsive documents that were lost when former Exempt Organizations Division Chief Lois Lerner’s hard drive crashed in 2011.

The report follows a detailed, 41-question letter sent by the committee on May 20, 2013, to the IRS requesting information about the alleged targeting by the IRS of certain social welfare organizations applying for tax-exempt status based on those organizations’ presumed political activities. That letter marked the beginning of a bipartisan investigation by the committee into the IRS’s activities related to the review of tax-exempt applications and related issues raised by the Treasury Inspector General for Tax Administration (TIGTA) in a May 14, 2013, report.

In June 2014, the committee learned that Lerner had experienced the hard drive failure in 2011, which raised questions about the IRS’s ability to produce all the documents necessary to complete the Senate Finance Committee investigation. Hatch and Wyden then asked TIGTA to investigate the matter.

The investigation found that IRS management “failed to provide effective control, guidance and direction” over the processing of applications for tax-exempt status between the years 2010 to 2013. In addition, it discovered that Lerner became aware of the Tea Party applications—which served as the basis for the investigation—in early 2010, but failed to inform her superiors about their existence.

The report stated that, “while under Lerner’s leadership, the Exempt Organizations Division undertook no less than seven poorly planned and badly executed initiatives aimed at bringing the growing number of applications from Tea Party and other groups to decision.”

“This bipartisan investigation shows gross mismanagement at the highest levels of the IRS and confirms an unacceptable truth: that the IRS is prone to abuse,” Hatch said in a statement. Wyden, however, said the investigation “showcases pure bureaucratic mismanagement without any evidence of political interference.”

Hatch made several recommendations following the report, including: having the IRS track the age and cycle times of applications for tax-exempt status to detect backlogs early in the process and allow management to take steps to address those backlogs; a list of overage applications should be sent to the commissioner on a quarterly basis; internal IRS guidance should require that employees reach a decision on applications no later than 270 days after the IRS receives that application; and having minimum training standards established for all managers within the EO Division to ensure that they have adequate technical ability to perform their jobs.

The Small Business Health Care Credit

What is the Credit?

The Small Business Health Care Credit is designed to help you provide health insurance coverage to your employees. For tax years 2010 through 2013, the credit can be up to 35% of your share of your employees’ health insurance premiums; or, if you’re an eligible tax-exempt employer, up to 25% of your share of premiums.

You are an eligible small employer for the tax year if you meet these three requirements.

  1. You paid premiums for employee health insurance coverage under a qualifying arrangement.
  2. You had fewer than 25 full-time equivalent employees (FTEs) for the tax year. You may be able to meet this requirement even if you had 25 or more employees.
  3. You paid average annual wages for the tax year of less than $50,000 per FTE.

For tax years 2014 and later, there are changes to the credit:

  • The credit can be up to 50% of your share of your employees’ health insurance premiums, or, if you’re an eligible tax-exempt employer, up to 35 percent of your share of premiums.
  • You must purchase insurance for your employees through the Small Business Health Options (SHOP) Marketplace.
  • The credit is only available to you for two consecutive years.

For more information contact a Templeton Tax Professional.



Benefits of a Health Savings Account

Given the ever-escalating cost of providing employee health care benefits we wanted to inform you of a more cost-effective method of providing these benefits; a health savings account (HSA). For eligible individuals, HSAs offer a tax-favorable way for employees to set aside funds (or their employer can do so) to meet future medical needs. Here are the key tax-related elements:

  • contributions employees make to an HSA are deductible, within limits,
  • contributions employers makes aren’t taxed to you,
  • earnings on the funds within the HSA are not taxed, and
  • distributions from the HSA to cover qualified medical expenses are not taxed.

Employee Requirements:

Who is eligible? To be eligible for an HSA, you must be covered by a “high deductible health plan” (discussed below). You must also not be covered by a plan which (1) is not a high deductible health plan, and (2) provides coverage for any benefit covered by your high deductible plan. (It’s okay, however, to be covered by a high deductible plan along with separate coverage, through insurance or otherwise, for accidents, disability, or dental, vision, or long-term care.)

For 2015, a “high deductible health plan” is a plan with an annual deductible of at least $1,300 for self-only coverage, or at least $2,600 for family coverage. For self-only coverage, the 2015  limit on deductible contributions is $3,350. For family coverage, the 2015 limit on deductible contributions is $6,650. Additionally, annual out-of-pocket expenses required to be paid (other than for premiums) for covered benefits cannot exceed $6,450 for self-only coverage or $12,900 for family coverage.

An individual (and the individual’s covered spouse as well) who has reached age 55 before the close of the tax year (and is an eligible HSA contributor) may make additional “catch-up” contributions for 2015 of up to $1,000.

A high deductible health plan does not include a plan if substantially all of the plan’s coverage is for accidents, disability, or dental, vision, or long-term care, insurance for a specified disease or illness, or insurance paying a fixed amount per day (or other period) of hospitalization.

HSAs may be established by, or on behalf of, any eligible individual.

Deduction limits. You can deduct contributions to an HSA for the year up to the total of your monthly limitations for the months you were eligible. For 2015, the monthly limitation on deductible contributions for a person with self-only coverage is 1/12 of $3,350. For an individual with family coverage, the monthly limitation on deductible contributions is 1/12 of $6,650. Thus, deductible contributions are not limited by the amount of the annual deductible under the high deductible health plan.

Also, taxpayers who are eligible individuals during the last month of the tax year are treated as having been eligible individuals for the entire year for purposes of computing the annual HSA contribution.

However, if an individual is enrolled in Medicare, he is no longer an eligible individual under the HSA rules, and so contributions to his HSA can no longer be made.

Contributions may be made to an HSA by or on behalf of an eligible individual even if the individual has no compensation, or if the contributions exceed the individual’s compensation. Contributions made by a family member on behalf of an eligible individual to an HSA (which are subject to the limits described above) are deductible by the eligible individual in computing adjusted gross income.

Further, on a once-only basis, taxpayers can withdraw funds from an IRA, and transfer them tax-free to an HSA. The amount transferred can be up to the maximum deductible HSA contribution for the type of coverage (individual or family) in effect at the time of the transfer. The amount so transferred is excluded from the taxpayer’s gross income, and is not subject to the 10% early withdrawal penalty.

Employer contributions. If you are an eligible individual, and your employer contributes to your HSA, the employer’s contribution is treated as employer-provided coverage for medical expenses under an accident or health plan and is excludable from your gross income up to the deduction limitation, as described above. Further, the employer contributions are not subject to withholding from wages for income tax or subject to FICA or FUTA. The eligible individual cannot deduct employer contributions on his federal income tax return as HSA contributions or as medical expense deductions.

An employer that decides to make contributions on its employees’ behalf must make comparable contributions to the HSAs of all comparable participating employees for that calendar year. If the employer does not make comparable contributions, the employer is subject to a 35% tax on the aggregate amount contributed by the employer to HSAs for that period.

Contributions are comparable if they are either: (1) the same amount; or (2) the same percentage of the annual deductible limit under the high deductible health plan covering the employees. For these purposes, comparable participating employees (1) are covered by the employer’s high deductible health plan and are eligible to establish an HSA; (2) have the same category of coverage (either self-only or family coverage); and (3) have the same category of employment (either part-time or full-time). (IRS regulations provide detailed guidelines for comparable contributions.)

An exception to the comparable contribution requirements applies for contributions made on behalf of non-highly compensated employees. Under this exception, an employer may make larger HSA contributions for non-highly compensated employees than for highly compensated employees.

Employer contributions are also excludable if made at the election of the employee under a salary reduction arrangement that is part of a cafeteria plan (i.e., a plan which allows you to elect to use part of your salary towards a variety of benefits). Although contributions to an employee’s HSA through a cafeteria plan are treated as employer contributions, the comparability rule does not apply to contributions made through a cafeteria plan.

Earnings. If the HSA is set up properly, it is generally exempt from taxation, and there is no tax on earnings. However, taxes may apply if contribution limitations are exceeded, required reports are not provided, or prohibited transactions occur.

Distributions. Distributions from the HSA to cover an eligible individual’s qualified medical expenses, or those of his spouse or dependents, are not taxed. Qualified medical expenses for these purposes generally mean those that would qualify for the medical expense itemized deduction. If funds are withdrawn from the HSA for other reasons, the withdrawal is taxable. Additionally, an extra 20% tax will apply to the withdrawal, unless it is made after reaching age 65, or in the event of death or disability.

Distributions from an HSA exclusively to pay for qualified medical expenses are excludable from the gross income of the account beneficiary even though the beneficiary is no longer an “eligible individual,” e.g., the individual is over age 65 and entitled to Medicare benefits, or no longer has a high deductible health plan.

As you can see, HSAs offer a very flexible option for providing health care coverage, but the rules are somewhat involved. Again, please call if you would like to discuss this topic further.