21.6.5  Individual Retirement Arrangements (IRA), Coverdell Education Savings Accounts (ESA), Archer Medical Savings Accounts (MSA) and Health Savings Accounts (HSA)

Manual Transmittal

September 12, 2014

Purpose

(1) This transmits revised IRM 21.6.5, Individual Tax Returns, Individual Retirement Arrangements (IRA), Coverdell Education Savings Accounts (ESA), Archer Medical Savings Accounts (MSA) and Health Savings Accounts (HSA)

Material Changes

(1) Various editorial changes made throughout.

(2) IPU 14U0093 issued 01-10-2014 IRM 21.6.5.2(3) - Added tax year 2014 information and deleted tax year 2008 information in the table.

(3) IRM 21.6.5.2(3) - Deleted tax year 2009 information from the table.

(4) IPU 14U0093 issued 01-10-2014 IRM 21.6.5.3.1(2) - Added tax year 2014 information and deleted tax year 2008 information in the table.

(5) IRM 21.6.5.3.1(2) - Deleted tax year 2009 information from the table and deleted the note below the table.

(6) IPU 14U0093 issued 01-10-2014 IRM 21.6.5.3.2(3) - Added tax year 2014 information and deleted tax year 2008 information in the table.

(7) IRM 21.6.5.3.2(3) - Deleted tax year 2009 information from the table.

(8) IRM 21.6.5.3.4(1) - Added tax years 2013 and 2014 information and deleted tax year 2008 information.

(9) IPU 14U0093 issued 01-10-2014 IRM 21.6.5.3.5(7) - Added tax year 2014 information and deleted tax year 2008 information in the table.

(10) IRM 21.6.5.3.5(7) - Deleted tax year 2009 information from the table.

(11) IPU 14U0093 issued 01-10-2014 IRM 21.6.5.4.7.1(1) - Added tax year 2014 information and deleted tax year 2008 information in the table.

(12) IRM 21.6.5.4.7.1(1) - Deleted tax year 2009 information from the table.

(13) IPU 14U0093 issued 01-10-2014 IRM 21.6.5.4.7.3(1) - Added tax year 2014 information and deleted tax year 2008 information in the table.

(14) IRM 21.6.5.4.7.3(1) - Deleted tax year 2009 information from the table.

(15) IRM 21.6.5.4.9(5) - Added tax year 2014 information and deleted tax year 2009 information from the table.

(16) IRM 21.6.5.4.9(13) - Deleted "and prior" in the table.

(17) IRM 21.6.5.4.9.1(3) 6th THEN box - Added information on the Form 8853 must be filed with the return.

(18) IRM 21.6.5.4.9.2(2) - Removed the statement "Open a new Archer MSA" , and removed the tax year 2006 information.

(19) IRM 21.6.5.4.9.3(3) 2nd bullet - Removed the word "only" after family.

(20) IRM 21.6.5.4.9.4 - Changed title of subsection from Part III to Part II.

(21) IPU 13U1550 issued 10-22-2013 IRM 21.6.5.4.9.4(3) - Added tax year 2014 to the table for the 20 percent tax.

(22) IPU 14U0093 issued 01-10-2014 IRM 21.6.5.4.9(5) and (13) - Added tax year 2014 information and deleted tax year 2008 information in the table.

(23) IRM 21.6.5.4.10.1(3) - Added tax year 2014 information and removed tax years 2008 and 2009 information in the table.

(24) IRM 21.6.5.4.10.2(4) - Added tax year 2014 information and removed tax years 2008 and 2009 information in the table.

(25) IRM 21.6.5.4.10.3(4) - Added Medicare Part C and other plans.

(26) IRM 21.6.5.4.10.3(5) - Removed tax years 2008 and 2009 information from the table.

(27) IPU 13U1550 issued 10-22-2013 IRM 21.6.5.4.10.3(5) - Added tax year 2014 to the table for the 20 percent tax.

(28) IPU 13U1550 issued 10-22-2013 IRM 21.6.5.4.11.4(6)(h) - Added to use hold code 3 when inputting TC 291.

Effect on Other Documents

IRM 21.6.5 dated 7-30-2013 (effective 10-01-2013) is superseded. This IRM incorporates IRM Procedural Updates (IPU) 13U1550 (issued 10-22-2013) and IPU 14U0093 (issued 01-10-2014).

Audience

All employees performing account/tax law work.

Effective Date

(10-01-2014)

James P. Clifford
Director, Accounts Management
Wage and Investment Division

21.6.5.1  (10-01-2013)
Individual Retirement Arrangements (IRA), Coverdell Education Savings Accounts (ESA), Archer Medical Savings Accounts (MSA) and Health Savings Accounts (HSA) Overview

  1. This section covers Individual Retirement Arrangements (IRA), Coverdell Education Savings Accounts (ESA), Archer Medical Savings Accounts (MSA) and Health Savings Accounts (HSA). It includes:

    • Regular IRA

    • Spousal IRA

    • Simplified Employee Pensions (SEP)

    • Savings Incentive Match Plans for Employees (SIMPLE)

    • IRA Rollover

    • Roth IRA

    • Coverdell Education Savings Accounts (ESA)

    • Archer MSA and Long Term Care Insurance Contracts

    • Health Savings Accounts (HSA)

    • Individual Retirement Account File (IRAF) Codes

    • Related Information

  2. In appropriate circumstances, refer taxpayers to the Taxpayer Advocate Service (TAS). When the taxpayer meets TAS Criteria and you can't resolve the taxpayers issue the same day, refer to IRM 13.1.7, TAS Case Criteria. The definition of "same day" is within 24 hours. "Same Day" cases include cases you can completely resolve in 24 hours, as well as cases in which you have taken steps within 24 hours to begin resolving the taxpayers issue. Do not refer "same day" cases to TAS unless the taxpayer asks to be transferred to TAS and the case meets TAS criteria. Refer to IRM 13.1.7.4, Same Day Resolution by Operations. When cases are referred to TAS, prepare a Form 911, Request for Taxpayer Advocate Service Assistance, (and Application for Taxpayer Assistance Order), and forward to TAS.

  3. The Pension Protection Act of 2006, (Pub L No. 109-280) enacted on August 17, 2006, allows penalty free IRA distributions for qualified military reservists. Refer to IRM 21.6.5.4.4, Early Distributions, for additional information.

  4. HR 1499, The Heroes Earned Retirement Opportunities Act (Pub. L. No. 109-227), enacted on May 29, 2006, allows military personnel to include their tax exempt combat pay in income for calculating their IRA contribution. Military personnel had until May 29, 2009 to make IRA contributions for 2004 and 2005. This law is effective for tax years beginning after 2003. Refer to Publication 3, Armed Forces' Tax Guide, for additional information.

  5. The Katrina Tax Relief Act of 2005 (KETRA) enacted on September 23, 2005 and the Gulf Opportunity (GO) Zone Act of 2005 enacted on December 21, 2005, provides tax-favored withdrawals, re-contributions, and loans for taxpayers with funds in certain retirement plans. These legislative acts were enacted for taxpayers impacted by Hurricanes Katrina, Rita, and Wilma. The legislative provisions include:

    • Up to $100,000 of qualified income distributions are exempt from the 10 percent additional tax for certain premature retirement plan distributions to residents of disaster areas who have sustained an economic loss

    • Permitting the inclusion of a qualified hurricane distribution averaged into the taxpayers gross income over a three-year period

    • Allowing the tax free re-contribution of retirement plan distributions withdrawn for home purchases or construction for a home in the disaster area(s) that was not purchased or constructed as a result of the disaster

    • Increasing the amount of loans from tax-exempt retirement plans available to qualified individuals residing in the hurricane disaster areas

    • Providing a one year suspension for payments due on qualifying plan loans

  6. Publication 4492, Information for Taxpayers Affected by Hurricanes Katrina, Rita, and Wilma, was developed to consolidate major relief provisions in both the KETRA and GO Zone Acts of 2005. Refer to this publication for details and guidance on the legislative changes related to retirement plans.

  7. Form 8915, Qualified Hurricane Retirement Plan Distributions and Repayments, was developed for use by eligible individuals impacted by Hurricanes Katrina, Wilma, and Rita to report distributions received from their qualified retirement plans for expenses related to the disasters.

  8. Refer to Publication 575, Pension and Annuity Income, and Publication 590, Individual Retirement Arrangements (IRAs), for additional information.

21.6.5.2  (10-01-2014)
What Is an Individual Retirement Arrangement (IRA)?

  1. An Individual Retirement Arrangement (IRA) is a personal savings plan that gives tax advantages for setting aside money for retirement.

    1. Contributions to the plan may be fully or partially deductible depending on the type of IRA. Roth IRAs are explained in IRM 21.6.5.4.7, Roth Individual Retirement Arrangement (IRA).

    2. The allowable IRA deduction may be less than the contributions, if the taxpayer or spouse is covered by an employer retirement plan any time during the year.

    3. The IRA deduction may be reduced or eliminated depending on filing status and amount of income.

  2. Amounts held in an IRA (including earnings) are generally not taxed until distributed.

  3. If covered by a retirement plan at work, the taxpayers deduction for contributions to a traditional IRA is reduced (phased out) if the modified adjusted gross income (MAGI) is:

    Year Married Filing Joint or Qualifying Widow(er) Single or Head of Household Married individual filing a Separate return
    2014 More than $96,000 but less than $116,000 More than $60,000 but less than $70,000 Less than $10,000
    2013 More than $95,000 but less than $115,000 More than $59,000 but less than $69,000 Less than $10,000
    2012 More than $92,000 but less than $112,000 More than $58,000 but less than $68,000 Less than $10,000
    2011 More than $90,000 but less than $110,000 More than $56,000 but less than $66,000 Less than $10,000
    2010 More than $89,000 but less than $109,000 More than $56,000 but less than $66,000 Less than $10,000
           
  4. For more information on deductible amounts, refer to Publication 590, Individual Retirement Arrangements (IRAs).

21.6.5.3  (10-01-2008)
Individual Retirement Arrangement (IRA) Research

  1. Individual Retirement Arrangement (IRA) information is found on the Individual Retirement Account File (IRAF), Master File Tax Code (MFT) 29. Refer to IRM 21.6.5.4.11, Individual Retirement Account File (IRAF) Overview, for researching IRAF accounts on MFT 29.

  2. Additional information is available in:

    • Publication 590, Individual Retirement Arrangements (IRAs). Refer to this publication for a detailed explanation of IRAs.

    • Publication 575, Pension and Annuity Income. Refer to this publication for more information about rollovers.

    • Publication 560, Retirement Plans for Small Business. Refer to this publication for more information about Simplified Employee Pensions (SEP).

    • Publication 4492, Information for Taxpayers Affected by Hurricanes Katrina, Rita, and Wilma. Refer to this publication for details and guidance on the KETRA and GO Zone legislative changes related to retirement plans for taxpayers impacted by Hurricanes Katrina, Rita, or Wilma. It was developed to consolidate major relief provisions in both the KETRA and GO Zone Acts of 2005.

    • Publication 54, Tax Guide for U.S. Citizens and Resident Aliens Abroad. Refer to this publication for special rules in determining contribution limitations when U.S. citizens/residents working and living abroad claim the foreign earned income exclusion and/or foreign housing deduction.

    • Publication 3, Armed Forces Tax Guide. Refer to this publication for information on HR 1499, Heroes Earned Retirement Opportunities Act.

21.6.5.3.1  (10-01-2014)
Regular or Traditional Individual Retirement Arrangement (IRA)

  1. An individual establishes a regular Individual Retirement Arrangement (IRA). The maximum deductible amount is limited to the least of the following:

    • The amount of compensation for the tax year, or

    • The amount of the actual IRA contribution (up to the maximum deductible contribution limit).

  2. The maximum deductible contribution limits are shown below.

    Year Regular Year Additional If 50 or Over
    2013 - 2014 $5,500 2013 - 2014 $1,000
    2010 - 2012 $5,000 2009 - 2012 $1,000

21.6.5.3.2  (10-01-2014)
Spousal Individual Retirement Arrangement (IRA)

  1. An IRA may be established in a spouse's name based on the compensation of the working spouse.

  2. There is no provision for a joint IRA.

  3. Spouse contributions in the case of a married taxpayer filing a joint return are shown below:

    Year Regular Spouse Additional if Spouse is age 50 or older
    2014 $5,500 $1,000
    2013 $5,500 $1,000
    2012 $5,000 $1,000
    2011 $5,000 $1,000
    2010 $5,000 $1,000
         

    For more information, refer to Spousal IRA Limits in Publication 590, Individual Retirement Arrangements (IRAs).

21.6.5.3.3  (10-01-2005)
Employer Plans Deemed to be Individual Retirement Arrangements (IRAs)

  1. A qualified employer retirement plan will be treated as an Individual Retirement Arrangement (IRA) (traditional or Roth) and not as a qualified plan if:

    1. The employer elects to allow employees to make voluntary employee contributions.

    2. Contributions are made to a separate account or annuity established under the plan and meet the requirements of an IRA.

  2. These amendments apply to plan years beginning after December 31, 2002.

  3. Refer to Publication 590, Individual Retirement Arrangements (IRAs), for more information on Deemed IRAs.

21.6.5.3.4  (10-01-2014)
Simplified Employee Pension (SEP)

  1. A Simplified Employee Pension (SEP) allows an employer to make contributions toward his/her own (if a self-employed individual) and employees’ retirement.

    Note:

    Contributions must be made for each eligible employee in a SEP, even if over age 701/1; however, such an employee must take minimum distributions.

    1. For tax years 2009 - 2011, the annual limit on the amount of employer contributions to an SEP is the smaller of $49,000 or 25 percent of participant’s compensation.

    2. For tax year 2012 the annual limit on the amount of employer contributions to an SEP is the smaller of $50,000 or 25 percent of participant's compensation.

    3. For tax year 2013 the annual limit on the amount of employer contributions to an SEP is smaller of $51,000 or 25 percent of the participant's compensation.

    4. For tax year 2014 the annual limit on the amount of employer contributions to an SEP is smaller of $52,000 or 25 percent of the participant's compensation.

    5. Contributions are generally tax deductible by the contributor and tax deferred (including earnings) for the plan participant until withdrawn. Maximum contributions are generally greater than IRAs.

    6. Special rules apply when computing the maximum deduction for a self-employed person.

    7. Refer to Publication 560, Retirement Plans for Small Business, for more information about SEPs.

  2. Taxpayers may make regular IRA contributions to a SEP-IRA up to the established maximum for traditional IRAs.

  3. A SEP-IRA may not be designated as a Roth IRA.

21.6.5.3.5  (10-01-2014)
Savings Incentive Match Plan for Employees (SIMPLE)

  1. A Savings Incentive Match Plan for Employees (SIMPLE) IRA Plan is a simplified retirement plan for small businesses. Generally, employers must have 100 or fewer employees to maintain a SIMPLE IRA Plan. Refer to information in Publication 560, Retirement Plans for Small Business, on the requirements employers must satisfy to set up a SIMPLE plan.

  2. The employer must make matching contributions or nonelective contributions to employee’s SIMPLE IRA.

  3. Special rules apply to SIMPLE IRAs. Refer to Publication 560, Retirement Plans for Small Business, for special rules and Publication 590, Individual Retirement Arrangements (IRAs), for additional information.

  4. Taxpayers may not make regular IRA contributions to SIMPLE IRAs.

  5. A SIMPLE IRA cannot be designated as a Roth IRA.

  6. Contributions to a SIMPLE IRA are not included in the regular IRA contribution limit.

  7. Under a SIMPLE IRA Plan, an eligible employee may elect to have his/her employer make limited annual salary reduction contributions to his/her SIMPLE IRA. Refer to the table below for annual limits on contribution amounts.

    Year Applicable Dollar Amount Additional if 50 or Over
    2013 - 2014 $12,000 $2,500
    2010 - 2012 $11,500 $2,500

21.6.5.3.6  (10-01-2013)
Individual Retirement Arrangement (IRA) Rollover

  1. A rollover is a tax-free distribution of cash or other assets from one retirement plan that is contributed (rolled over) to another retirement plan (see discussion of Roth IRAs later).

    Note:

    The IRS may waive the 60 day requirement where the failure to do so would be against equity or good conscience, such as in the event of casualty, disaster, or other event beyond the taxpayer reasonable control. For more information refer to "Time Limit for Making a Rollover Contribution" in Publication 590, Individual Retirement Arrangements (IRAs).

  2. A rollover cannot be deducted on the tax return, but the distribution must be reported (even if it is not includible in gross income).

  3. Required minimum distributions and distributions from inherited IRAs (from someone other than taxpayers spouse) may not be rolled over.

    Note:

    The Pension Protection Act of 2006, enacted on August 17, 2006, (Pub L No. 109-280), provides that, beginning January 1, 2007, non-spouses may directly transfer amounts inherited from a qualified employer-sponsored retirement plan into an individual IRA account. The account must be set up as an inherited retirement account.

  4. A taxpayer may roll over the taxable part of any eligible rollover distribution from a qualified employer retirement plan.

  5. Beginning in 2002, after-tax contributions may be rolled into an IRA. Refer to Publication 590, Individual Retirement Arrangements (IRAs), for information on when after-tax contributions may be rolled over to a qualified employer plan.

  6. Beginning with TY 2002, the 60 day period for IRA rollovers can be waived in certain situations such as casualty, disaster, or other events beyond the individual’s reasonable control.

  7. Refer to Publication 590, Individual Retirement Arrangements (IRAs), for more information on eligible rollover distributions.

  8. Refer to Publication 4492, Information for Taxpayers Affected by Hurricanes Katrina, Rita, and Wilma, for details and guidance on the KETRA and GO Zone legislative changes related to retirement plans for taxpayers impacted by Hurricanes Katrina, Rita or Wilma. This publication was developed to consolidate major relief provisions in both the KETRA and GO Zone Acts of 2005.

  9. First-Time Homebuyer - The taxpayer may be able to use an exception to limit or avoid a 10 percent additional tax on up to $10,000 of the distributions when they are used to buy, build, or rebuild a principal residence. If the requirements of the exception cannot be met because the planned purchase or construction of the home falls through, the law allows the taxpayer to return the distribution to an IRA within 120 days in order to avoid the tax.

  10. The Federal Aviation Administration (FAA) Modernization and Reform Act of 2012, enacted on February 14, 2012, allows qualified airline employees to roll over up to 90 percent of all airline payments received to a traditional IRA. It would also allow qualified airline employees who previously rolled over any airline payments to a Roth IRA to transfer a portion of the rollover contribution (including any allocable income or loss as a rollover contribution to a traditional IRA, limited to 90 percent of all airline payments received. Generally, the rollover contribution to the traditional IRA must be made within 180 days from the date the airline payment was received, or before August 14, 2012, whichever is later. Refer to Pub 590, Individual Retirement Arrangements (IRAs) for additional information.

21.6.5.3.6.1  (10-01-2006)
Hardship 401(k) or 403(b) Distributions

  1. Certain hardship distributions made after December 31, 1999 are not eligible rollover distributions and may not be rolled over to any IRA. Hardship distributions of an employee’s elective contributions to a 401(k) plan may not be rolled over. Likewise, hardship distributions of contributions made to a 403(b) plan under a salary reduction agreement may not be rolled over.

  2. Refer to Publication 571, Tax Sheltered Annuity Plans (403(b) Plans) for Employees of Public Schools and Certain Tax-Exempt Organizations, for more information about 403(b) plans.

  3. Refer to Publication 4492, Information for Taxpayers Affected by Hurricanes Katrina, Rita, and Wilma, for details and guidance on the KETRA and GO Zone legislative changes related to retirement plans for taxpayers impacted by Hurricanes Katrina, Rita or Wilma. This publication was developed to consolidate major relief provisions in both the KETRA and GO Zone Acts of 2005.

21.6.5.4  (10-01-2006)
Individual Retirement Arrangement (IRA) Procedures

  1. This section provides information on:

    • Individual Retirement Arrangements (IRAs)

    • Coverdell Education Savings Accounts (ESAs)

    • Archer Medical Savings Accounts (MSAs) and Long-Term Care Insurance Contracts

    • Health Savings Accounts (HSAs)

    • Individual Retirement Account File (IRAF) (MFT 29)

21.6.5.4.1  (10-01-2011)
Nondeductible IRA Contributions/Form 8606

  1. Nondeductible contributions are those contributions to a traditional IRA which are within the contribution limit but do not qualify as deductible.

  2. Earnings on nondeductible contributions are not taxed until distributed.

  3. Nondeductible contributions are not taxed when withdrawn from the IRA.

  4. Form 8606, Non Deductible IRAs, is used to report:

    • Nondeductible IRA contributions

    • Distributions from traditional, SEP, or SIMPLE IRAs, if nondeductible contributions to traditional IRAs were made in 2005 or an earlier year

    • Distributions from Roth IRAs

    • Conversions from traditional, SEP, or SIMPLE IRAs to Roth IRAs

  5. Taxpayers meeting requirements to file Form 8606, Nondeductible IRAs, must file the form even if they do not file a tax return for the tax year. Refer to Publication 590, Individual Retirement Arrangements (IRAs), for additional details.

  6. Whenever a Form 8606 without a return is received in Accounts Management and the original return has posted, refer to the following table:

    If And Then
    You can determine that no adjustment will be necessary You have the actual Form 8606 Locate and associate the loose form with the controlling document locator number (DLN). Use a Form 3210, Document Transmittal, when forwarding to another location. If the original return was filed electronically, refer to IRM 21.6.6.3.25, Electronic Filing System.
    You can determine that no adjustment will be necessary The Form 8606 was scanned into the Correspondence Imaging System (CIS) CIS images do not have to be associated with the original return. A case note can be added to quickly identify the loose form. Refer to IRM 21.5.1.5.3, CIS Source Documentation, for additional information.
    You are unable to determine whether an adjustment is needed You have the actual Form 8606
    1. Return the Form 8606 to the taxpayer.

    2. Advise the taxpayer that a Form 1040X, Amended U.S. Individual Income Tax Return is required to amend the original return.

    You are unable to determine whether an adjustment is needed The Form 8606 was scanned into CIS CIS images do not have to be returned to the taxpayer. Advise the taxpayer that a Form 1040X, Amended U.S. Individual Income Tax Return, is required to amend the original return.
  7. Whenever a Form 8606 without a return is received in Accounts Management and the original return has not posted, refer to the following table:

    If And Then
    You can determine that no adjustment will be necessary You have the actual Form 8606 Input a transaction code (TC) 930 push code, if appropriate, to file the information. Refer to IRM 21.5.1.4.4.1, TC 930 Push Codes and IRM 21.5.1.4.4.2, Inappropriate use of TC 930 Push Codes.
    You can determine that no adjustment will be necessary The Form 8606 was scanned into CIS Do not input the push code if the document was scanned in CIS. Refer to IRM 21.5.1.5.7, CIS Push Codes, for additional information.
    You are unable to determine whether an adjustment will be necessary or if you can determine that an adjustment will be needed You have the actual Form 8606 and there is an indication the return has been filed or will be filed. Refer to IRM 21.4.1.3.1, Locating the Taxpayer’s Return, for additional information.

    Note:

    Consider any form received prior to the return due date as an indication the taxpayer will file.

    Input a TC 930 push code using your employee number as indicated in IRM 21.5.1.4.4.1, TC 930 Push Codes.

    Reminder:

    In certain instances, TC 930 push codes procedures should not be used. Refer to IRM 21.5.1.4.4.2, Inappropriate Use of TC 930 Push Code.

    You are unable to determine whether an adjustment will be necessary or if you can determine that an adjustment will be needed The Form 8606 was scanned into CIS and there is an indication the return has been filed or will be filed. Refer to IRM 21.5.1.5.7, CIS Push Codes, for additional information.
    An adjustment will or will not be needed You have the actual Form 8606 and there is no indication the return has been filed and it is beyond the return due date
    1. Return the Form 8606 to the taxpayer.

    2. Advise the taxpayer that a Form 1040X, Amended U.S. Individual Income Tax Return, is required to amend the original return.

    An adjustment will or will not be needed The Form 8606 was scanned into CIS and there is no indication the return has been filed and it is beyond the return due date CIS images do not have to be returned to the taxpayer. Advise the taxpayer that a Form 1040X, Amended U.S. Individual Income Tax Return, is required to amend the original return.
  8. If taxpayer is not required to file a return and a Form 8606 was received refer to the following table:

    If And Then
    No return was filed and taxpayer is not required to file a return You have the actual Form 8606 Forward the Form 8606 to files on a Form 3210, Document Transmittal with the notation "To be filed in Alpha Files" .
    No return was filed and taxpayer is not required to file a return The Form 8606 was scanned into CIS CIS images do not have to be associated with the original return. A case note can be added to quickly identify the loose form. Refer to IRM 21.5.1.5.3, CIS Source Documentation, for additional information.
  9. If the taxpayer submits a $50 penalty payment, refund payment to taxpayer with a letter explaining the penalty is currently not assessed. Manual refund procedures will need to be followed when issuing the refund. Refer to IRM 21.4.4, Manual Refunds, for information concerning manual refunds.

21.6.5.4.2  (10-01-2006)
Individual Retirement Arrangement (IRA)Taxes

  1. If the taxpayer does not conform to the rules governing IRAs, additional taxes are assessed. These taxes are assessed on the Individual Master File (IMF) and/or the Individual Retirement Account File (IRAF).

  2. Form 5329, Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts, is used to report additional taxes on:

    • Individual Retirement Arrangements (IRAs)

    • Other qualified retirement plans

    • Coverdell Education Savings Accounts (ESAs)

    • Qualified Tuition Programs (QTPs)

    • Archer Medical Savings Accounts (MSAs)

    • Health Savings Accounts (HSAs)

21.6.5.4.3  (10-01-2013)
Excess Contributions Tax

  1. An excess contribution is an amount contributed to the taxpayer's Individual Retirement Arrangement (IRA) in excess of the amount of compensation for the tax year, or the IRA contribution limit that applies to the taxpayer for that year. Refer to IRM 21.6.5.4.7.1, Contribution Limits, and IRM 21.6.5.3.1, Regular or Traditional Individual Retirement Arrangement (IRA), for information about contribution limits.

  2. The 6 percent excise tax is assessed on the Individual Retirement Account File (IRAF, MFT 29), each year on any excess amount in an IRA account at the end of the year.

  3. The 6 percent excise tax is not assessed if excess contributions, plus earnings, are withdrawn before the return due date, including extensions:

    1. The 6 percent tax is assessed for the year an excess contribution was made and each year after, until the excess is withdrawn, or later exhausted as an allowable current year contribution.

    2. The person entitled to the deduction for either a regular or spousal IRA must pay the tax on excess contributions.

    3. The tax cannot be more than 6 percent of the value of the IRA on the last day of the year.

21.6.5.4.4  (10-01-2013)
Early Distributions

  1. Early distributions are amounts withdrawn, or considered withdrawn, from an Individual Retirement Arrangement (IRA) before the owner reaches age 591/1.

  2. When the IRS issues a levy on an IRA account to cover back taxes, this is a taxable distribution to the account owner even though the funds are transferred directly from the account to the IRS and not actually received by the owner. However, under certain conditions, the 10 percent additional tax may not apply to distributions attributable to an IRS levy. Refer to Publication 590, Individual Retirement Arrangements (IRAs).

    • Early distributions are included in gross income and may be subject to 10 percent additional tax.

    • The 10 percent additional tax is assessed on IMF (MFT 30), not IRAF (MFT 29).

  3. If a taxpayer borrows from their IRA accounts, or otherwise engages in a prohibited transaction under Code Section 4975 with respect to the IRA, then the IRA ceases to be an IRA. The taxpayer is considered to have received a distribution of their entire amount of interest in the IRA. In addition, if a taxpayer uses the IRA as security for a loan, the taxpayer is considered to have received a distribution from the IRA of the amount used. These distributions are subject to the 10 percent tax on early distributions from qualified plans and cannot be rolled over.

  4. 10 percent additional tax does not apply to premature distributions which are:

    1. Received after permanent total disability of the owner.

    2. Received after the death of the owner.

    3. Rolled over to another retirement plan or IRA (including conversions to Roth IRAs).

    4. Part of a series of substantially equal payments over the owner’s life (or the joint lives of the owner and owner's beneficiary of an annuity).

      Note:

      Rev. Rul. 2002-62, dated October 3, 2002, allows taxpayers who meet certain criteria to make a one time switch, without penalty, to a method of determining the amount of their payment based on the value of their account as it changes from year to year. For complete information, refer to Rev. Rul. 2002-62.

    5. A return of nondeductible contributions.

    6. Used to pay medical expenses in excess of 7.5 percent of AGI prior to January 1, 2013; or beginning January 1, 2013, used to pay medical expenses in excess of 10 percent of AGI.

    7. Used by certain unemployed, or self-employed taxpayers to pay health insurance premiums.

    8. Used for qualified higher education expenses. This exception does not apply to distributions prior to 1998.

    9. Distributions (up to $10,000) used to buy or rebuild a first home. This exception does not apply to distributions prior to 1998.

    Note:

    Refer to additional exceptions in the instructions for Form 5329, Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts.

  5. The Pension Protection Act of 2006, (Pub L No. 109-280) enacted on August 17, 2006, allows penalty free IRA distributions for qualified military reservists. Under the provision:

    • The 10 percent early distribution tax that normally applies to most retirement distributions received before age 59 1/2 is eliminated for eligible military reservists.

    • Eligible military reservists activated after September 11, 2001 and called to active duty for at least 180 days qualify for this relief.

    • Active duty reservists can choose to re-contribute part or all of these distributions to an IRA. If the reservists active duty ended before August 17, 2006, they have until August 17, 2008, to make these special contributions. No deduction is available for these contributions.

    • If the 10 percent tax was already paid on a distribution, eligible reservists may file Form 1040X, Amended U.S. Individual Income Tax Return, to claim a refund. The words "Active Duty" should be written on the top of the form. Part II, Explanation of Changes, should include the date they were called to active duty, the amount of the retirement distribution and the amount of early distribution tax paid.

  6. If the taxpayer has filed an amended return and includes income from an Early Distribution that may be subject to the 10 percent early withdraw penalty, DO NOT assess the 10 percent tax, if the taxpayer does not include the Form 5329, Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts. Process the amended return and forward the case to Exam after verifying that the early distribution is subject to the 10 percent tax. Refer to Pub 590, Individual Retirement Arrangements (IRAs), Early Distributions.
    Refer only cases that are subject to the 10 percent penalty and meet the following criteria:

    • Income over $10,000 that is subject to the 10 percent tax and

    • Tax over $1,000

  7. The Heroes Earnings Assistance and Relief Tax Act (HEART) (HR 6081) enacted June 17, 2008, allows active duty troops to withdraw money from retirement plans, and provides an allowance of two years to replace the funds without the additional 10 percent tax.

  8. Refer to Publication 4492, Information for Taxpayers Affected by Hurricanes Katrina, Rita, and Wilma, for details and guidance on the KETRA and GO Zone legislative changes related to retirement plans for taxpayers impacted by Hurricanes Katrina, Rita or Wilma. This publication was developed to consolidate major relief provisions in both the KETRA and GO Zone Acts of 2005.

  9. Taxpayers who had payments made by direct deposit under the Economic Stimulus Act of 2008, P.L. No. 110-185, to their IRAs could remove an amount less than or equal to the payments without incurring any adverse tax consequences, to the extent that the withdrawal was made no later than the time for filing the taxpayer's income tax return for 2008, plus extensions.

  10. Refer to Publication 4492–A, Information for Taxpayers Affected by the May 4, 2007, Kansas Storms and Tornadoes, for details and guidance related to retirement plans for taxpayers impacted by the Kansas storms that began May 4, 2007.

21.6.5.4.5  (10-01-2013)
Excess Accumulations

  1. Upon reaching the age of 701/1, most IRA owners are required to start receiving at least minimum distributions from their IRAs (refer to Roth IRAs later in this section). Excess accumulations result when actual distributions from an IRA during the year are less than the required minimum distribution for the year.

    1. A taxpayer must receive the initial distribution by April 1 of the year following the year in which he/she reaches age 701/1.

    2. Subsequent required distributions (including the one for the year following the year owner reaches 701/1) must be made by December 31 of each year.

    3. The taxpayer may be subject to a 50 percent excise tax on the difference between the required distribution and the actual distribution.

    Exception:

    On December 23, 2008, the President signed the Worker, Retiree, and Employer Recovery Act of 2008 (the Act) into law. Section 201 of the Act waives any required minimum distribution (RMD) for 2009 from an Individual Retirement Arrangement (IRA). This means that most participants and beneficiaries otherwise required to take minimum distributions from these types of accounts were not required to withdraw any amount in 2009. If they did make a withdrawal in 2009 (that is not a RMD for 2008), they may have been able to roll over the withdrawn amount into other eligible retirement plans. They were still required to include any previously untaxed portion of the withdrawal they did not roll over in their gross income. Refer to Publication 590, Individual Retirement Arrangements (IRAs), for additional information on rollovers and on calculating the taxable portion of a withdrawal or distribution.
    The Act does not waive any 2008 RMDs, even for individuals who were eligible and chose to delay taking their 2008 RMD until April 1, 2009, (e.g., IRA owners who turned 70 1/2 in 2008). These individuals must have taken their full 2008 RMD by April 1, 2009, or they could have faced a 50 percent excise tax on the amount not withdrawn. The 2009 RMD waiver under the Act does apply to individuals who were eligible to postpone taking their 2009 RMD until April 1, 2010, (generally, IRA owners who attain age 70 1/2 in 2009). However, the Act did not waive any RMDs for 2010. If a beneficiary was receiving distributions over a 5 year period, he or she could have waived the distribution for 2009, effectively taking distributions over a 6 year rather than a 5 year period.

  2. The Pension Protection Act of 2006, enacted on August 17, 2006, (Pub L No. 109-280), provides an exclusion from gross income for taxpayers at least 701/1 years of age who contribute funds from their IRA to a charitable organization. This is known as a Qualified Charitable Distribution (QCD). The provision provides:

    • The distribution is made from a traditional IRA or Roth IRA and is donated directly to a qualified charity.

    • The distribution counts against the required minimum distribution for the year.

    • The maximum tax-free distribution amount is $100,000.00 per taxpayer per taxable year.

    • The provision applies to tax years 2006 through 2013.

    • For tax year 2010, IRA owners can choose to treat QCDs made during January 2011 as if they occurred in 2010. In addition, for tax-year 2012, IRA owners can choose to treat certain contributions made to a qualified charity in January 2013 as 2012 QCDs.

    • The contribution cannot be taken as a charitable deduction on Schedule A, Itemized Deductions.

  3. A 50 percent excise tax is assessed on excess accumulations and is assessed on the Individual Retirement Arrangement File (IRAF), MFT 29.

  4. The excise tax is waived if the taxpayer establishes that the excess accumulation was due to a reasonable error and steps are being taken to remedy the situation. Refer to Publication 590, Individual Retirement Arrangements (IRAs), for additional information. An IRAF (MFT 29) account must be established before a waiver can be granted. Refer to IRM 21.6.5.4.11.4, Processing Form 5329 With TC 971 AC 144, for procedures to establish the IRAF (MFT 29) account.

    Note:

    In 2006, the instruction to include payment for the excise tax on excess accumulations when submitting a waiver, was deleted from the Publication 590.

21.6.5.4.6  (10-01-2009)
Excess Distributions

  1. The tax on excess distributions from qualified retirement plans was eliminated for 1997 and all subsequent years. In previous years, this tax (one of the taxes reported on Form 5329) applied to distributions from qualified retirement plans (including IRA’s) in excess of $155,000 for regular distributions and $775,000 for lump sum distributions. Refer to Form 5329, Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts, for exceptions and additional information.

21.6.5.4.7  (10-01-2002)
Roth Individual Retirement Arrangement (IRA)

  1. With a Roth IRA:

    • Contributions are nondeductible.

    • Distributions may be tax-free depending on how and when the taxpayer withdraws money from the account.

    • Account must be designated as a Roth IRA when it is established.

  2. Trustees of Roth or ordinary IRAs report information regarding distributions and contributions on Form 1099-R, Distribution From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc., and Form 5498, IRA Contribution Information.

21.6.5.4.7.1  (10-01-2014)
Contribution Limits

  1. Contribution limits on regular IRAs and Roth IRAs are coordinated. The maximum total yearly contribution that can be made by an individual to all IRAs (deductible, nondeductible, and Roth) is the lesser of the individual’s taxable compensation for the year (this does not include rollovers.), or for

    Year Roth Contribution Limit Additional if 50 or older
    2013 - 2014 $5,500 $1,000
    2010 - 2012 $5,000 $1,000

    Note:

    In determining compensation for this purpose, taxpayers must not take into account amounts they exclude under either the foreign earned income exclusion or the foreign housing exclusion. Also, they must not reduce their compensation by the foreign housing deduction.


    IRA contributions may be affected by modified adjusted gross income (MAGI) limits. Refer to Publication 590, Individual Retirement Arrangements (IRAs), for additional details. Refer to Publication 54, Tax Guide for U.S. Citizens and Resident Aliens Abroad, for information pertaining to foreign exclusions or deductions.

  2. Taxpayers are allowed to contribute to a Roth IRA after age 701/1.

  3. Excess contributions are subject to 6 percent tax under IRC Section 4973.

21.6.5.4.7.2  (10-01-2005)
Excess Contributions

  1. Treat an excess contribution which is distributed from a Roth IRA before the return due date for the year the contribution was made as an amount not contributed.

  2. An excess contribution distributed after the return due date for the year the contribution was made is treated as a regular distribution from the Roth IRA.

21.6.5.4.7.3  (10-01-2014)
Phase Out (Income Limit)

  1. The maximum yearly contribution that can be made to a Roth IRA is phased out based on modified adjusted gross income (AGI) and filing status as follows:

    Year Married Filing Joint or Qualifying Widow(er) Married Filing Separately Single, Head of Household, or All Others
    2014 At least $181,000 to $191,000 $10,000 or more At least $114,000 but less than $129,000
    2013 At least $178,000 to $188,000 $10,000 or more At least $112,000 but less than $127,000
    2012 At least $173,000 but less than $183,000 $10,000 or more At least $110,000 but less than $125,000
    2011 At least $169,000 but less than $179,000 $10,000 or more At least $107,000 but less than $122,000
    2010 At least $167,000 but less than $177,000 $10,000 or more At least $105,000 but less than $120,000


    Refer to Publication 590, Individual Retirement Arrangements (IRAs), for additional information.

21.6.5.4.7.4  (10-01-2009)
Five-Year Holding Period

  1. The five-year holding period is satisfied if Roth distributions (including distributions allocable to conversion contributions) are not made before the end of the five-tax year period beginning with the first tax year that the taxpayer made a contribution to a Roth IRA.

  2. As with other IRAs, a regular contribution can be made by the due date for filing a tax return for the year, without regard to extensions. In this case, the five tax year holding period begins with the tax year that a contribution is first made to a Roth IRA. A subsequent contribution does not start a new five-year period.

  3. Distribution of a Roth conversion amount within five years of the conversion may cause the 10 percent additional tax on early distributions to be imposed; even if the amount distributed is not includible in gross income. Refer to Publication 590, Individual Retirement Arrangements (IRAs), for more information.

21.6.5.4.7.5  (10-01-2010)
Qualified Distributions

  1. Qualified distributions from a Roth IRA are not includible in gross income and are not subject to 10 percent tax on early withdrawals.

    Note:

    Taxpayers may take a loss on their Roth IRA investment due to decline in stock market values. Refer to Publication 590, Individual Retirement Arrangements (IRAs), Chapter 2, Roth IRAs, Section Recognizing Losses on Investments.

  2. A qualified distribution is any payment or distribution from a Roth IRA that meets the following requirements:
    It has been at least 5 years from the beginning of the year in which the taxpayer first set up and contributed to the Roth IRA and the distribution is:

    • Made on or after the taxpayer reaches age 591/1, or

    • Made upon death, or taxpayer becomes disabled, or

    • Made to qualified home buyer.

  3. Refer to Publication 590, Individual Retirement Arrangements (IRAs), for more information on qualified distributions.

21.6.5.4.7.6  (10-01-2002)
Nonqualified Distributions

  1. Nonqualified distributions may be includible in gross income. Contributions are withdrawn tax-free. Earnings are included in gross income and may be subject to 10 percent tax on early withdrawals. Refer to Publication 590, Individual Retirement Arrangements (IRAs), for details on nonqualified distributions from an IRA.

  2. Treat nonqualified distributions from a Roth IRA as:

    1. Made from regular contributions first and then conversion contributions on a first in first out (FIFO) basis.

    2. All of an individual’s Roth IRAs are treated as a single Roth IRA.

    3. No part of a distribution is treated as earnings until the total of all distributions from all the taxpayers Roth IRAs exceed the amount of contributions to all the taxpayers Roth IRAs.

21.6.5.4.7.7  (10-01-2010)
Acceleration of Income Inclusion

  1. If an account contains both conversion and contributory amounts, or conversion amounts from different years, "Ordering Rules" determine which amounts are withdrawn for tax purposes.

    1. Regular Roth IRA contributions are treated as withdrawn first.

    2. Converted amounts (starting with amounts first converted). Withdrawals of converted amounts will be treated as coming first from converted amounts that were includible in income. Earnings will continue to be treated as withdrawn after contributions.

21.6.5.4.7.8  (10-01-2006)
Minimum Distribution

  1. The minimum distribution rules applying to other IRAs generally do not apply to Roth IRAs while the owner is alive.

  2. However, after the death of a Roth IRA owner, certain minimum distribution rules that apply to traditional IRAs also apply to Roth IRAs. Refer to Publication 590, Individual Retirement Arrangements (IRAs), for additional information.

21.6.5.4.7.9  (01-31-2012)
Rollovers and Conversions into Roth IRAs

  1. The following may be rolled over into a Roth IRA:

    1. Distributions from a Roth IRA may be rolled over tax-free to another Roth IRA.

    2. Amounts in a traditional IRA can be converted into a Roth IRA. For tax years before 2010, a conversion is only permitted if the taxpayers modified AGI (for Roth IRA purposes) for the tax year is not more than $100,000 and the taxpayer, does not file a married, filing separate tax return.

    3. The amounts converted must be included in gross income as if they had been distributed from the traditional IRA except the 10 percent tax does not apply.

    Note:

    For distributions made in 2008 or later, eligible rollover distributions from a qualified plan may be rolled over directly to a Roth IRAs, with taxable portion of the rollover amount taxed at the time of the rollover. IRC §408A(e), as amended by Section 824 of the Pension Protection Act (PPA) of 2006. The rollover is subject to the same conditions as a conversion of a traditional IRA to a Roth IRA.

    Note:

    The $100,000 AGI limit does not include amounts added to income from the conversion of an traditional IRA into a Roth IRA.

  2. For tax years beginning after December 31, 2004, required minimum distributions will not be included in AGI when determining qualification for converting traditional IRAs into Roth IRAs.

  3. To correct an erroneous conversion of a regular IRA to a Roth IRA, the taxpayer may recharacterize the conversion contribution as follows:

    If And Then
    Taxpayer converts a regular IRA to a Roth IRA Later determines he/she was not eligible (due to AGI or other limits not met) or wishes to change it back before due date of the return, including extensions The contributions and earnings may be transferred in a trustee-to-trustee transfer to a traditional IRA.
    Such a trustee-to-trustee transfer is made
    1. Contributions and net income from contributions are included.

    2. No deduction was allowed in respect to the contribution to transfer to the IRA.

    Any such contributions are treated as if they were made to the transferee IRA (the IRA transferred to).

    Note:

    (1) These transfers may be between IRA trustees and IRA custodians or IRAs with same trustee or custodian.
    (2) Regular IRA and Roth IRA contributions may also be recharacterized.

  4. The general IRA rollover/conversion rules must be met.

    Note:

    Income resulting from the conversion of a traditional IRA to a Roth IRA is reported on the income tax return for the year the funds exited the traditional IRA.

    Example:

    If the funds were distributed to the taxpayer in 2010, who then rolled over the funds to a Roth IRA in 2011 (within 60 days), the conversion income is reported for 2010.

  5. Tax Increase Prevention and Reconciliation Act of 2005 (TIPRA) changes IRC Section 408A. Beginning in tax year 2010, the $100,000 modified AGI limit for conversions and rollovers is eliminated and married taxpayers filing a separate return can now roll over amounts to a Roth IRA. For rollovers from qualified retirement plans to a Roth IRA in 2010, any amounts that are required to be included in income are included in equal amounts in tax year 2011 and tax year 2012. The taxpayer can choose to include the entire amount in tax year 2010. Taxpayers will complete Form 8606, Nondeductible IRAs, Part II.

  6. Small Business Jobs Act Section 2112, effective September 27, 2010, permits participants in 401(k) and 403(b) plans to rollover amounts in their pre-tax plan account into their Roth account within the same plan. This is referred to as the "In Plan Roth Conversion Option" .

    1. The distribution from the pre-tax plan account must be included in taxable income. For rollovers in 2010 only, taxpayers can elect to report 50 percent of the distribution in tax year 2011 and 50 percent in tax year 2012, unless the taxpayer elects to include the entire distribution in tax year 2010.

    2. Taxpayers will not be subject to the 10 percent additional tax unless they distribute the rollover amount from their Roth account within 5 years after the rollover is contributed.

    3. Taxpayers will complete Form 8606, Nondeductible IRAs, Part III.

    4. For additional information refer to Publication 575, Pension and Annuity Income (Including Simplified General Rule).

21.6.5.4.7.10  (10-01-2011)
Roth IRA Recharacterization

  1. Treasury Regulation Section 301.9100-2(b) grants taxpayers 6 months (from the unextended due date of the return) to recharacterize Roth IRA conversions without penalty.

    1. The taxpayer had to timely file the tax return.

    2. The taxpayer had to recharacterize any Roth conversion for which the taxpayer did not meet the requirements during the 6 month period.

    3. This 6 month extension was not available to taxpayers already on extension. These taxpayers had to recharacterize by the extended due date of the return.

  2. For tax years before 2010, taxpayers who filed Married Filing Separately (MFS), or had income above $100,000 and are not eligible to convert a regular IRA to a Roth IRA are subject to penalties if they do not recharacterize the conversion.

  3. The taxpayer in some cases needed to:

    1. File an amended return and change the filing status if they were eligible to do so, to avoid possible contact from Underreporter or Examination.

    2. Reconvert/recharacterize the Roth IRAs back to regular IRAs (file Form 1040X, U.S. Amended Individual Tax Return, with Form 8606, Non-Deductible IRAs, and an explanation).

      Note:

      Taxpayers normally file Form 8606, Nondeductible IRAs, with a Form 1040, U.S. Individual Income Tax Return or Form 1040X, Amended U.S. Individual Income Tax Return. However, IRS will process a Form 8606 without Form 1040 or Form 1040X. Refer to Publication 590, Individual Retirement Arrangements (IRAs), for additional details.

  4. Pursuant to Treasury Regulation Section 301.9100-2(d), the statement: "Filed Pursuant to Section 301.9100-2(d)" was required to be written on the Form 1040X, Amended U.S. Individual Income Tax Return.

  5. Financial institutions were informed that taxpayers were allowed an additional six months to recharacterize.

  6. For more information on how erroneous conversions to Roth IRAs are corrected, refer to the instructions to Form 8606.

  7. Follow normal procedures for abatement of penalty if applicable.

21.6.5.4.7.11  (10-05-2005)
Qualified Roth Contribution Program

  1. Pub. L No. 107-16 provides that an employee may elect to make designated Roth contributions in lieu of elective deferrals under the applicable retirement plan. The employee must:

    1. Maintain separate record keeping for each account,

    2. Establish separate accounts, and

    3. Ensure elective deferrals meet the requirements to be a designated Roth contribution.

  2. Provisions concerning deferrals as Roth contributions apply to taxable years beginning after 2005.

21.6.5.4.8  (10-01-2013)
Coverdell Education Savings Accounts (ESAs)

  1. Effective for taxable years beginning after December 3, 1997, eligible individuals (subject to modified adjusted gross income limitations) may establish and contribute cash only to a Coverdell Education Savings Account (ESA). Contributions to an ESA are not deductible, but amounts deposited grow tax free until distributed. The total of all contributions to all ESA's for any one beneficiary cannot be more than $2,000. Pub. L. No. 107-16 revised Coverdell rules to cover elementary and secondary education expenses if special requirements are met. Contributions can be made, without penalty, to both a Coverdell and Qualified Tuition Program in the same year for the same beneficiary.

  2. Any distribution that exceeds qualified education expenses is taxed under IRC Section 72 annuity rules.

  3. The American Opportunity, Hope or Lifetime credit can be claimed in the same year the beneficiary takes a tax-free distribution from Coverdell ESA, as long as the same expenses are not used for both benefits. This means the beneficiary must reduce qualified higher education expenses by tax-free educational assistance, and then further reduce them by any expenses taken into account in determining an American opportunity, Hope or Lifetime learning credit.

    Note:

    The taxpayer should receive a Form 1099-Q, Payments From Qualified Education Programs, for the breakdown. If taxpayer states no form received, refer to Publication 970, Tax Benefits for Education, Chapter 7, Coordination With American Opportunity and Lifetime Learning Credits

    , for calculations of the credit.

  4. The earnings portion of a distribution that exceeds qualified education expenses is included in gross income and is subject to a 10 percent additional tax unless an exception applies. This additional tax is reported on Part II, Form 5329, Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts.

  5. The Military Family Tax Relief Act of 2003 (Pub. L. No. 108-121) exempts the additional 10 percent tax for withdrawals from Coverdell Education accounts for non-educational use, because of attendance at United States service academies (i.e., U.S. Military Academy, U.S. Naval Academy, U.S. Air Force Academy, U.S. Coast Guard Academy, or the U.S. Merchant Marine Academy).

    • Penalty-free withdrawals are limited to the cost of the academy education at the applicable academy.

    • The requirement to include in income the earnings portion of distributions that are not used for qualified education expenses has not changed.

    • The provision applies to taxable years beginning after December 31, 2002.

  6. Excess contributions and earnings must be distributed before the first day of the sixth month of the following tax year.

  7. Refer to Publication 970, Tax Benefits for Education, for more information about Coverdell ESAs.

21.6.5.4.8.1  (10-01-2013)
Qualified Tuition Programs (QTP) (529 Plans)

  1. Pub. L. No. 107-16 provides that certain colleges and universities may sponsor prepaid tuition programs under Section 529. Both prepaid and savings programs may be sponsored by states.

    Note:

    Contributions to Qualified Tuition Programs (QTP) are considered gifts under federal gift tax regulations, Therefore, any contributions in excess of $13,000 ($65,000 if filing single over five years), $26,000 ($130,000 if filing married jointly over a five-year period) per donor count against the one time gift/estate tax exemption. The five-year period is known as the five-year carry-forward option: Once the single donor puts in $65,000 or married jointly donor puts in $130,000, they are not able to make another contribution (gift) to that individual (without using part of their lifetime gifting exclusion) for five years. On or after January 1, 2013, any contributions in excess of $14,000 ($70,000 if filing single over a five-year period), $28,000 ($140,000 if filing married jointly over a five-year period) per donor count against the one time gift/estate tax exemption. The five-year period is known as the five-year carry-forward option: Once the single donor puts in $70,000 or married jointly donor puts in $140,000, they are not able to make another contribution (gift) to that individual (without using part of their lifetime gifting exclusion) for five years.

  2. Section 529 requires that a qualified tuition program sponsored by an eligible educational institution (defined in Section 481 of the Higher Education Act of 1965: 20. U.S. 1088) must hold amounts in a qualified trust, and must have received a ruling or determination from the Service that the qualified tuition program meets the applicable requirements.

  3. Beginning in 2002, if a taxpayer contributes to a Coverdell Education Savings Account, the taxpayer may also contribute to a Section 529 program. Refer to Publication 970, Tax Benefits for Education, for more information about QTP.

  4. Refer to Pub. L. No. 107-16 that further defines qualified higher educational expenses which can be paid with funds from a Coverdell Education Savings Account or a Section 529 program.

  5. The earnings portion of a Qualified Tuition Program (QTP) distribution that exceeds qualified higher education expenses is included in gross income and is subject to a 10 percent additional tax unless an exception applies. This additional tax is reported on Part II, Form 5329, Additional Taxes on Qualified Plans (including IRAs) and Other Tax-Favored Accounts.

  6. Beginning in 2004, a distribution from a QTP established and maintained by an eligible educational institution (generally private colleges and universities) can be excluded from income if the amount distributed is not more than qualified educational expenses. For more information on tax-free QTP distributions, refer to Chapter 8 in Publication 970, Tax Benefits for Education.

  7. The Military Family Tax Relief Act of 2003 (Pub. L. No. 108-121) exempts the additional 10 percent tax for withdrawals from Section 529 QTP accounts for non-educational use, because of attendance at United States service academies (i.e., U.S. Military Academy, U.S. Naval Academy, U.S. Air Force Academy, U.S. Coast Guard Academy, or the U.S. Merchant Marine Academy). Refer to IRM 21.6.5.1, Individual Retirement Arrangements (IRA), Coverdell Education Savings Accounts (ESA), Archer Medical Savings Accounts (MSA) and Health Savings Accounts (HSA) Overview, for additional information.

21.6.5.4.8.2  (10-01-2002)
National Health Service Corps Scholarship

  1. Effective for tax years beginning after December 31, 2001.

  2. Pub. L. No. 107-16 liberalized rules for the exclusion of income from the National Health Service Corps Scholarship Program and the F. Edward Hebert Armed Forces Health Professions Scholarship and Financial Assistance Program. Refer to Publication 970, Tax Benefits for Education, for more information.

21.6.5.4.8.3  (10-01-2010)
Rollover of Coverdell Education Savings Accounts

  1. Before a beneficiary reaches age 30, the balance in a Coverdell Education Savings Account may be transferred or rolled over into another Coverdell Education Savings Account for the beneficiary or a member of the former beneficiary’s family (including the beneficiary's spouse) who is under age 30. This age limitation does not apply if the new beneficiary is a special needs beneficiary. Refer to Publication 970,Tax Benefits for Education, for more information.

  2. Transfers upon death or divorce to a spouse/member of beneficiary’s family under age 30 are generally not taxable and the spouse or family member treats the account as his or her own.

21.6.5.4.9  (10-01-2014)
Archer (MSA) and Long-Term Care Insurance Contracts

  1. The Health Insurance Portability and Accountability Act of 1996 permitted eligible individuals to establish Archer Medical Savings Accounts (MSA). The Balanced Budget Act of 1997 allowed the establishment of a Medicare Advantage MSA. The Community Renewal Tax Relief Act of 2000 extended MSA until 2002. Refer to IRM 21.6.5.4.9.1, Medicare Advantage MSA, for additional details.

  2. A provision to extend the Archer MSA Program was enacted by the Tax Relief and Health Care Act of 2006, which extended the program through December 31, 2006.

  3. An Archer MSA is:

    • Established, created, or organized in the United States

    • Exclusively for the purpose of paying the qualified medical expenses of the account holder, spouse or dependent in conjunction with a high deductible health plan, and

    • Subject to rules similar to those applicable to IRAs

  4. Archer MSAs are available to:

    • Employee (or employee's spouse) covered under an employer sponsored high deductible health plan of a small employer.

    • Self-employed individual (or spouse of self-employed individual) with coverage under a high deductible health plan.

  5. A high deductible health plan has the following limits for annual deductible with applicable cost-of-living adjustments:

    Deductible and Out-of-Pocket Expenses for Tax Year 2014 Self-only Coverage Family Coverage
    Minimum Annual Deductible $2,200 $4,350
    Maximum Annual Deductible $3,250 $6,550
    Maximum Annual Out-of-Pocket Expenses $4,350 $8,000
    Deductible and Out-of-Pocket Expenses for Tax Year 2013 Self-only Coverage Family Coverage
    Minimum Annual Deductible $2,150 $4,300
    Maximum Annual Deductible $3,200 $6,450
    Maximum Annual Out-of-Pocket Expenses $4,300 $7,850


    Deductible and Out-of-Pocket Expenses for Tax Year 2012 Self-only Coverage Family Coverage
    Minimum Annual Deductible $2,100 $4,200
    Maximum Annual Deductible $3,150 $6,300
    Maximum Annual Out-of-Pocket Expenses $4,200 $7,650


    Deductible and Out-of-Pocket Expenses for Tax Year 2011 Self-only Coverage Family Coverage
    Minimum Annual Deductible $2,050 $4,100
    Maximum Annual Deductible $3,050 $6,150
    Maximum Annual Out-of-Pocket Expenses $4,100 $7,500


    Deductible and Out-of-Pocket Expenses for Tax Year 2010 Self-only Coverage Family Coverage
    Minimum Annual Deductible $2,000 $4,050
    Maximum Annual Deductible $3,000 $6,050
    Maximum Annual Out-of-Pocket Expenses $4,050 $7,400


  6. Contributions to an Archer MSA are deductible if made by the account holder and excludible if made by his/or her employer up to a limit. Refer to Publication 969, Health Savings Accounts and Other Tax-Favored Health Plans, for more information.

  7. For tax years beginning after December 31, 2010, nonprescription medicines (other than insulin) no longer qualify for Archer MSA purposes.

  8. The taxpayer may have to pay additional tax if the contributions are more than the allowable deduction (does not apply to Medicare Advantage MSA). The tax is:

    • Reported on Form 5329, Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts, Part VI, Additional Tax on Excess Contributions to Archer MSAs.

    • Assessed on IRAF, MFT 29. Refer to Refer to IRM 21.6.5.4.11, Individual Retirement Account File (IRAF) Overview, for more information on IRAF assessments.

    • The smaller of 6 percent of the excess contributions or the value of the MSA on the last day of the tax year.

  9. The taxpayer may withdraw some or all of the excess contributions, by the due date of the return (including extensions). The withdrawn contributions will not be taxed as excess contributions if:

    • No deduction is claimed for the amount of the contribution withdrawn.

    • Any income earned on the withdrawn contributions is also withdrawn.

    • The withdrawn income, earned on withdrawn contributions, is included in the account holder’s gross income under other income on the tax return for the year the withdrawal of the contribution and earnings occurred.

  10. Earnings on amounts in an Archer MSA are not taxable.

  11. Generally, distributions from an Archer MSA for qualified medical expenses (unreimbursed medical expenses that could otherwise be deductible on Schedule A, Itemized Deductions) are excludible from the account holder’s gross income.

  12. The taxpayer is liable for tax on any taxable Archer MSA distributions not for qualified medical expenses. The tax is:

    • Reported on Form 1040, U.S. Individual Tax Return.

    • Assessed on the IMF, MFT 30.

  13. The taxpayer is liable for an additional tax on the taxable Archer MSA distributions, if an exception does not apply. The tax is:

    • Reported on Form 8853, Archer MSAs and Long Term Care Insurance Contracts, Section A, Part II, Archer MSA Distributions.

    • Assessed on the IMF, MFT 30.

      Tax Year Additional Tax
      2011 - 2014 20 percent
      2010 15 percent
  14. For more information on Archer MSAs, refer to Publication 969, Health Savings Accounts and Other Tax-Favored Health Plans.

21.6.5.4.9.1  (10-01-2014)
Medicare Advantage MSA

  1. The Balanced Budget Act of 1997 permits eligible individuals to establish a Medicare Advantage Medical Savings Account (MSA), IRC Section 138. MSAs are administered through the Federal Medicare program. Refer to Publication 969, Health Savings Accounts and Other Tax-Favored Health Plans, for more information on Medicare Advantage MSAs.

  2. Medicare Advantage MSA distributions are reported on Form 8853, Archer MSAs and Long Term Care Insurance Contracts, Section B, Medicare Advantage MSA Distributions.

  3. Refer to the table below for Medicare Advantage MSA guidelines:

    If Then
    Medicare Advantage MSA Individual must be enrolled in Medicare.
    Medicare Advantage MSA Must have a high deductible health plan that meets Medicare guidelines.
    Medicare Advantage MSA Contributions to the account are made only by Medicare.
    Medicare Advantage MSA Contributions and earnings are not taxable while in the account.
    Distributions are not used for qualified medical expenses of the account holder. Distributions are taxable.
    Distributions are not used for qualified medical expenses of the account holder. Distributions are reported on Form 8853, Archer MSAs and Long-Term Care Insurance Contracts and may be subject to an additional 50 percent tax. The Form 8853 must be filed with the tax return if individual has a Medicare Advantage MSA. Refer to Publication 969, Health Savings Accounts and Other Tax-Favored Health Plans, for additional information.

21.6.5.4.9.2  (10-01-2014)
Form 8853 - Archer MSAs and Long-Term Care Insurance Contracts

  1. The Form 8853, Archer MSAs and Long-Term Care Insurance Contracts, for returns filed after 2000, was extensively revised to add Medicare Advantage MSA Accounts.

  2. Form 8853 must be filed if, during the tax year, the taxpayer or spouse (if filing joint):

    1. An employee or employer made contributions to an existing Archer MSA.

    2. Received distributions from an existing Archer MSA or Medicare Advantage MSA.

    3. Acquired an interest in a Archer MSA or Medicare Advantage MSA due to the death of the account holder.

    4. Received distributions from a long-term care insurance contract.

    5. Received certain accelerated death benefits from a life insurance contract.

  3. Section B, Medicare Advantage MSA Distributions, is used to report Medicare Advantage MSA Distributions, figure taxable distributions and additional tax.

  4. Section C, Long Term Care (LTC) Insurance Contracts, is used to report Long-Term Care Insurance contracts.

21.6.5.4.9.3  (10-01-2014)
Form 8853, Archer MSAs and Long-Term Care Insurance Contracts, Part II Archer MSA Contributions and Deductions

  1. Within limits, contributions to an Archer MSA are:

    • Deductible if made by eligible individuals

    • Excludable if made by the employer

      Exception:

      The exclusion does not apply to contributions made through a cafeteria plan.

  2. The taxpayer or spouse may not contribute to an Archer MSA if the employer made any contributions ( Form W-2, Wage and Tax Statement, Box 12 with Code R).

  3. The deduction is limited to:

    • 65 percent of the annual deductible (self-only coverage)

    • 75 percent of the annual deductible (family coverage)

  4. Contributions for a particular tax year can be made until the due date (without regard to extensions) of the individual income tax return for that year.

  5. The Archer MSA deduction is the smallest of:

    • The amount of contributions for the year.

    • The amount of compensation from the employer sponsoring the high deductible health plan.

    • The net earnings from self-employment (if applicable), or

    • The MSA limitation.

21.6.5.4.9.4  (10-01-2014)
Form 8853, Archer MSAs and Long-Term Care Insurance Contracts, Part II - Archer MSA Distributions

  1. The taxpayer is taxed on all distributions received in the tax year from all Archer MSAs to the extent the distributions were not used for qualified medical expenses of the account holder, his spouse, or dependents.

  2. Distributions not for medical expenses are also subject to an additional tax unless made:

    • After age 65 (account holder).

    • After death (account holder).

    • After disability (account holder).

  3. The additional tax is as follows:

    Tax Year Additional Tax
    2011-2014 20 percent
    2010 15 percent
  4. The taxpayer may rollover a distribution (withdrawal) of assets from one Archer MSA into another Archer MSA or health savings account (HSA). Generally, the distribution must be rolled over within 60 days following the distribution to qualify as tax-free.

    Note:

    A trustee-to-trustee transfer of funds from an Archer MSA directly to another Archer MSA or HSA is not considered a rollover for purposes of the one rollover per year rule.

  5. Form 8853, Section A, Part II, is used for computing any taxable distributions and the additional tax.

21.6.5.4.9.5  (10-01-2005)
Form 8853, Archer MSAs and Long-Term Care Insurance Contracts, Section B, Medicare Advantage MSA Distributions

  1. Medicare Advantage Medical Savings Account (MSA) distributions are reported on Form 8853, Section B.

  2. The taxpayer does not make contributions to a Medicare Advantage MSA account. Contributions are governed by Part B of title XVIII of the Social Security Act (Medicare makes contributions to the account).

  3. The taxpayer is taxed on distributions received in the tax year to the extent the distributions were not used for unreimbursed qualified medical expenses.

  4. Distributions not for unreimbursed qualified medical expenses are also subject to an additional 50 percent tax to the extent they reduce the prior year account balance below an established floor unless made after the account holder:

    • Dies, or

    • Becomes disabled.

      If And Then
      The account holder dies The designated beneficiary is the account holder’s surviving spouse The Medicare Advantage MSA account is treated as a regular MSA of the spouse.
      The account holder dies There are any distributions after the date of death They are reported in Section B Part II.
      There are any qualified medical expenses incurred by the account holder before date of death Paid by the surviving spouse within one year after the date of death Include on line 9 of Section A, Part II.
      The account holder dies The designated beneficiary is not the account holder’s surviving spouse The account ceases to be an MSA as of the date of death and the fair market value of the account is included in the beneficiary’s gross income.
      There are any qualified medical expenses incurred by the account holder before date of death Paid by the beneficiary within one year after the date of death Information is reported in Section B and the distribution is not subject to tax to the extent of the qualified medical expenses.
  5. Trustee-to-Trustee transfers of Medicare Advantage MSA accounts are permitted.

  6. A separate Form 8853, with Section B completed, must be filed for each spouse if both spouses received distributions from a Medicare Advantage MSA.

21.6.5.4.9.6  (04-25-2012)
Form 8853, Archer MSAs and Long-Term Care Insurance Contracts, Section C, Long-Term Care (LTC) Insurance Contracts

  1. The taxpayer must complete Form 8853, Section C, if the taxpayer (policyholder) or spouse (if filing jointly) was a policyholder who received payments made on a per diem or other periodic basis under a qualified LTC insurance contract or received certain accelerated death benefits on a per diem or other periodic basis.

  2. A separate Form 8853, Section C, must be filed for each insured person for whom the taxpayer received payments.

  3. Any taxable benefits are reported on Form 8853, Section C, Line 26 and on line 21 of Form 1040, U.S. Individual Tax Return.

  4. The individual owning the proceeds of the qualified LTC contract is required to report the income for tax purposes, regardless of whether the payment is assigned to a third party.

  5. Amounts paid as reimbursements for qualified LTC services under a qualified LTC contract are excluded from income.

    1. The excludable amount is limited if payments are made on a per diem basis or other periodic basis.

    2. The per diem exclusion limit must be allocated among all policyholders who own qualified LTC insured contracts for the same insured.

  6. Amounts paid as accelerated death benefits are fully excludable from income if the insured has been certified by a physician as terminally ill. These amounts are excludable, to the same extent they would be if paid under a qualified LTC insurance contract, if the insured has been certified by a licensed health care practitioner as chronically ill.

21.6.5.4.10  (01-03-2011)
Health Savings Accounts (HSAs)

  1. Section 1201 of the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (Pub. L. No. 108-173) permits eligible individuals to establish Health Savings Accounts (HSAs) for taxable years beginning after December 31, 2003. Amounts in an HSA may be accumulated over the years or distributed on a tax-free basis to pay or reimburse qualified medical expenses.

  2. An HSA is a tax-exempt trust or custodial account established exclusively for the purpose of paying qualified medical expenses of the beneficiary, who for the months the contributions are made to an HSA, is covered under a high-deductible health plan.

  3. The Affordable Care Act, Provision 9003, effective January 1, 2011 established that some expenses will no longer qualify as a "qualified medical expense" . Over-the-counter medicine will no longer be considered a qualified medical expense unless they are prescribed. This applies to purchases made on January 1, 2011 or later. Exceptions are medical devices, eye glasses, contacts, health insurance co-pays and deductibles are still qualified medical expenses and reimbursable after December 31, 2010.

  4. Many of the rules that apply to HSAs are similar to rules that apply to IRAs and Archer MSAs. An HSA is established for the benefit of an individual, is owned by that individual, and is portable. If the individual is an employee who later changes employers, or leaves the work force, the HSA does not stay with the former employer, but stays with the individual.

21.6.5.4.10.1  (10-01-2014)
Who Is Eligible for Health Savings Accounts (HSAs)?

  1. An eligible individual can establish a Health Savings Account (HSA). An eligible individual (for any month) is:

    • Covered under a high deductible health plan (HDHP) on the first day of such month.

    • Not covered by another health plan that is not an HDHP (with certain exceptions for plans providing limited types of coverage).

    • Not enrolled in Medicare.

    • Not claimed as a dependent on another person’s tax return.

  2. Generally, an HDHP is a health plan that meets certain requirements for deductibles and out-of-pocket expenses.

  3. In the table below, the annual deductible (other than for premiums) are at least the amount given. The out-of-pocket expenses (deductibles, co-payments and other amounts, but not premiums) do not exceed the amount given.

    Tax Year Annual Deductible for Self-only Coverage Out-of-pocket Expenses for Self-only Coverage Annual Deductible for Family Coverage Out-of-pocket Expenses for Family Coverage
    2014 $1,250 $6,350 $2,500 $12,700
    2013 $1,250 $6,250 $2,500 $12,500
    2012 $1,200 $6,050 $2,400 $12,100
    2011 $1,200 $6,050 $2,400 $12,100
    2010 $1,200 $5,950 $2,400 $11,900

21.6.5.4.10.2  (10-01-2014)
Health Savings Account (HSA) Contributions

  1. For a Health Savings Account (HSA) established by an employee, the employee, the employee’s employer or both may contribute to the HSA of the employee in a given year.

  2. For an HSA established by a self-employed (or unemployed) individual, the individual may contribute to the HSA.

  3. Family members may also make contributions to an HSA on behalf of another family member or any other person as long as that other family member is an eligible individual.

  4. The maximum annual contributions and for individuals (and their spouses covered under the HDHP) between the ages of 55 and 65, the catch-up contributions, are as follows:

    Tax Year Annual Contribution for Self-only Coverage Catch-up Contribution for Self-only Coverage Annual Contribution for Family Coverage Catch-up Contribution for Family Coverage
    2014 $3,300 $1,000 $6,550 $1,000
    2013 $3,250 $1,000 $6,450 $1,000
    2012 $3,100 $1,000 $6,250 $1,000
    2011 $3,050 $1,000 $6,150 $1,000
    2010 $3,050 $1,000 $6,150 $1,000
  5. After an individual is enrolled in Medicare after age 65, contributions, including catch-up contributions, cannot be made to an individual’s HSA.

  6. HSA contributions made by an eligible individual, by a family member, or by any other person on behalf of an individual, are:

    • Deductible by the eligible individual in determining adjusted gross income.

    • Computed using Form 8889, Health Savings Accounts (HSAs), Part I, HSA Contributions and Deduction and reported on line 25 of the Form 1040, U.S. Individual Income Tax Return.

    • Not deductible as a medical expense itemized deduction.

    • Deductible if made in cash and not in the form of stock or other property.

    • Not deductible if the individual is being claimed as a dependent on another person's tax return.

    • Not deductible on Form 1040 or as medical expenses on Schedule A, if the HSA contributions were made by the employer.

  7. For calendar year taxpayers, the deadline for contributions to an HSA is generally April 15 following the year for which the contributions are made.

    Note:

    The maximum annual contribution may be made if an individual is an eligible individual as of December 1. If not, the contribution amount is determined on a monthly basis.

21.6.5.4.10.2.1  (10-01-2004)
Excess Health Savings Accounts (HSA) Contributions

  1. Contributions by an employer to a Health Savings Account (HSA) for an employee are included in the gross income of the employee to the extent that they exceed the allowable contribution limits or if they are made on behalf of an employee who is not an eligible individual.

  2. An excise tax of 6 percent is imposed for excess individual and employer contributions. This excise tax is reported on Form 5329, Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts, Part VII, Additional Tax on Excess Contributions to Health Savings Accounts (HSAs), and posted to the IRAF, MFT 29 account. Refer to IRM 21.6.5.4.11.7, Individual Retirement Account File (IRAF) Tax Adjustments, for information on adjusting IRAF, MFT 29 accounts.

21.6.5.4.10.2.2  (10-01-2007)
Rollover Contributions to Health Savings Accounts (HSAs)

  1. Rollover contributions from Archer MSAs and other Health Savings Accounts (HSAs) into an HSA are permitted.

  2. Rollovers are not subject to the annual contribution limits.

  3. Rollovers from an IRA, from a health reimbursement arrangement or from a health flexible spending arrangement to an HSA may be permitted under certain circumstances.

21.6.5.4.10.3  (10-01-2014)
Health Savings Account (HSA) Distributions

  1. Distributions from a Health Savings Account (HSA) used exclusively to pay for qualified medical expenses of the account beneficiary, his or her spouse or dependents, are excludable from gross income. The amounts in an HSA can be used for qualified medical expenses and are excludable from gross income even if the individual is not currently eligible for contributions to the HSA.

  2. Qualified medical expenses are expenses paid by the account beneficiary, his or her spouse, or dependents for medical care as defined in IRC Section 213(d) but only to the extent the expenses are not covered by insurance or otherwise. The qualified medical expenses must be incurred after the HSA has been established.

  3. For purposes of determining the itemized deduction for medical expenses, medical expenses paid or reimbursed by distributions from an HSA are not treated as expenses paid for medical care under IRC Section 213.

  4. Health insurance premiums are not considered qualified medical expenses except for the following:

    • Qualified long-term care insurance.

    • Continuation coverage under federal law (e.g., Consolidated Omnibus Reconciliation Act (COBRA) or Uniformed Services Employment and Reemployment Rights Act (USERRA) coverage).

    • Health care coverage while an individual is receiving unemployment compensation.

    • Premiums for Medicare Part A or B, Medicare Health Maintenance Organization (HMO) and Medicare Advantage Plans (Part C of Medicare) (for individuals over age 65).

    • Preferred Provider Organization, Private Fee for Service Plans, and Special Needs Plans

    • Premiums for employer sponsored retiree health insurance (for individuals over age 65). For additional information refer to, Publication 969, Health Savings Accounts and Other Tax-Favored Health Plans.

    Note:

    Premiums for Medigap policies are not qualified medical expenses.

  5. Any amount of the distribution not used exclusively for qualified medical expenses of the account beneficiary, spouse or dependents is includible in gross income of the account beneficiary and is subject to an additional tax on the amount includible in income. Refer to table below for the percentage of additional tax.

    Tax Year Additional Tax
    2011 - 2014 20 percent Tax
    2010 10 percent Tax

    Exception:

    Distributions made after the account beneficiary’s death, disability or attaining age 65 are not subject to the additional tax.

  6. Form 8889, Health Savings Accounts (HSAs), Part II, HSA Distributions, is used to compute the taxable amount of the HSA distribution. It is included in the total amount reported on line 21 of the Form 1040, U.S. Individual Income Tax Return. Taxpayers are instructed to enter "HSA" and the amount on the dotted line next to line 21. The additional tax, if applicable, is included in the total amount reported on the Form 1040, line 60. Taxpayers are instructed to enter "HSA" and the amount on the dotted line next to line 60.

  7. If the account beneficiary is no longer an eligible individual (attained age 65 and entitled to Medicare benefits, or no longer has an HDHP), distributions used exclusively to pay for qualified medical expenses continue to be excludable from the account beneficiary’s gross income.

  8. Upon death, any balance remaining in the account beneficiary’s HSA becomes the property of the individual named in the HSA as the beneficiary of the account.

    • If the account beneficiary is the surviving spouse, the surviving spouse is subject to income tax only to the extent distributions from the HSA are not used for qualified medical expenses.

    • If the account beneficiary is a person other than the surviving spouse, the HSA ceases to be an HSA as of the date of death. The account beneficiary is required to include in their gross income the fair market value of the HSA assets as of the date of death. The includable amount in the account beneficiary’s gross income (except the decedent’s estate) is reduced by any payments from the HSA made for the decedent’s qualified medical expenses, if paid within one year after death.

21.6.5.4.11  (10-01-2006)
Individual Retirement Account File (IRAF) Overview

  1. The Individual Retirement Account File (IRAF) is accessed with MFT 29. When a taxable Form 5329, Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts, is processed with an original Form 1040, U.S. Individual Income Tax Return, an Individual Retirement Account File (IRAF) (MFT 29) is established by return information extracted from IMF.

    Exception:

    Form 5329, Part I, Additional Tax on Early Distributions, or Part II, Additional Tax on Certain Distributions from Educational Accounts, post to IMF, MFT 30.

  2. The spouse indicator (1 for the primary taxpayer or 2 for the secondary taxpayer) shows which spouse on a joint return filed the Form 5329. The spousal indicator is displayed on command code (CC) IMFOLR and CC RTVUE.

  3. The type indicator (displayed on CC IMFOLR) is a code edited on Form 5329 or generated by input of TC 971 action code (AC) 144. Refer to IRM 21.6.5.4.11.4, Processing Form 5329 With TC 971 AC 144. It tells the computer whether or not to post Form 1040, U.S. Individual Tax Return, and indicates a dummy or original return. Valid indicators are:

    IRAF Code Explanation of Code
    0 Indicates an original Form 1040 with accompanying IRA data. This code is not used to input a Form 5329.
    1
    1. Indicates Form 5329 was received without Form 1040. This is used by Document Perfection when dummy return is prepared, or

    2. MFT 29 was established from input of TC 971 AC 144. Refer to IRM 21.6.5.4.11.4, Processing Form 5329 With TC 971 AC 144.

    2 Indicates Form 5329 was accompanied by a Form 1040X, Amended U.S. Individual Income Tax Return, an amended Form 1040 or correspondence, and IMF adjustments are completed. This allows Form 5329 to post to IRAF based on input of a dummy Form 1040.
    3 Indicates all necessary adjustments were made to both IMF and IRAF. If transaction code is 977, this type indicator does not issue CP 36, Duplicate Filing Notice, or set a -A freeze.
  4. Effective January 2006, a programming change allows a systemically generated TC 846 on IRAF MFT 29 modules (using the same programming process as MFT 30), providing freeze code conditions that prevent refunds are not present.

  5. The input of a TC 971, AC 144 on an IMF MFT 30 module will generate a corresponding IRAF MFT 29 module. This eliminates the requirement to forward a dummy Form 1040 to processing with Form 5329 to establish an IRAF MFT 29 account. Refer to IRM 21.6.5.4.11.4, Processing Form 5329 With TC 971 AC 144, to establish IRAF MFT 29 accounts for loose Forms 5329 or Form 5329 received with amended returns.

21.6.5.4.11.1  (05-25-2006)
Individual Retirement Account File (IRAF) Filing History Codes

  1. The following Individual Retirement Account File (IRAF) Filing History Codes are displayed on IMF entity:

    History Code Explanation of Code
    6 IRAF Notice issued to secondary taxpayer.
    7 IRAF Notice issued to primary and secondary taxpayer.

21.6.5.4.11.2  (02-21-2008)
Individual Retirement Account File (IRAF) Abstract Numbers

  1. Abstract numbers must be used with any Individual Retirement Account File (IRAF) MFT 29 tax adjustment. IRM 21.6.5.4.11.7, Individual Retirement Account File (IRAF) Tax Adjustments, for information on input of adjustments with abstract numbers. Valid item Abstract Numbers are:

    Abstract Number Explanation of Number
    160 Increase or decrease tax on excess contributions. Reported on Form 5329, Part III, Additional Tax on Excess Contributions to Traditional IRAs.
    162 Increase or decrease in accumulations tax. Reported on Form 5329, Part VIII, Additional Tax on Excess Accumulation in Qualified Retirement Plans (Including IRAs).
    194 Increase or decrease in tax on excess regular distributions. (For tax year 1996 and prior only.)
    195 Increase or decrease in tax on excess lump sum distributions. (For tax year 1996 and prior only.)
    233 Increase or decrease tax on Archer Medical Savings Account (MSA) excess contributions. Reported on Form 5329, Part VI, Additional Tax on Excess Contributions to Archer MSAs.
    235 Increase or decrease in tax on Coverdell IRA excess contributions. Reported on Form 5329, Part V, Additional Tax on Excess Contributions to Coverdell ESAs.
    236 Increase or decrease in tax on Roth IRA excess contributions. Reported on Form 5329, Part IV, Additional Tax on Excess Contributions to Roth IRAs.
    237 Increase or decrease to additional 6 percent tax on excess contributions to HSAs. Reported on Form 5329, Part VII, Additional Tax on Excess Contributions to Health Savings Accounts (HSAs).

    Note:

    Abstract Numbers 194 and 195 are not valid for periods after 199612.

  2. The TC 29X amount must equal combined Abstract Numbers 160, 162, 194, 195, 233, 235, 236, and 237 amounts.

21.6.5.4.11.3  (05-25-2006)
Individual Retirement Account File (IRAF) Blocking Series and Source Documents

  1. Adjustments to Individual Retirement Account File (IRAF) MFT 29 modules are Non-Source Document (NSD) adjustments if the MFT 29 module is established from input of a dummy Form 1040. Supporting documents are not attached to this type of an IRAF adjustment.

  2. Adjustments to IRAF (MFT 29) modules are Source Document adjustments if the MFT 29 module is established from the input of TC 971 AC 144 to the corresponding IMF MFT 30 account. Supporting documents are attached to the IRAF MFT 29 adjustment.

  3. Use blocking series (BS) 00 on all IRAF adjustments except in the following specific cases:

    BS Used for
    50 Adjustments created by Revenue Act of 1978 and Public Law 95-458.
    70 Mathematical/clerical errors.
    80 Offers in Compromise.
    96 Penalty Appeals Indicator Set.
    97 Penalty Appeals Indicator Released.

    Note:

    Source codes (SC) and reason codes (RC) cannot post to MFT 29 IRAF accounts. Do not use any SC or RC when adjusting MFT 29 IRAF accounts. For information on hold codes, refer to IRM 21.5.2.4.15, Rules on Hold Codes (HC).

21.6.5.4.11.4  (10-22-2013)
Processing Form 5329 With TC 971 AC 144

  1. Effective January 2006, the input of a TC 971 AC 144 on a MFT 30 module generates a corresponding MFT 29 module for Form 5329, Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts.

    • The TC 971 AC 144 generates an IRAF MFT 29 module with a TC 150 for .00. A TC 971 AC 144 is also generated on the MFT 29 module.

    • The TC 971 date is also the TC 150 date on the MFT 29 module. Applicable penalty and interest generate based on the TC 150 date.

    • IRAF MFT 29 modules generated by the input of TC 971 AC 144 to the corresponding IMF MFT 30 account are identified by the TC 150 DLN. The IRAF MFT 29 TC 150 DLN is the same as the TC 971 AC 144 DLN, except the document code is 11 and the Julian date is always 886.

    • The type indicator and the IRAF Spousal Indicator (if applicable) generate and post to CC IMFOLR.

    • Normal tax liability offsets occur.

  2. Installment Agreements (IA) and Direct Debit Installment Agreements are permitted on MFT 29 modules.

  3. Systemically generated refunds, TC 846, occur on MFT 29 modules using the same programming process as MFT 30 systemic refunds.

  4. If a Form 1040X, Amended U.S. Individual Income Tax Return, is received and the additional tax is for the Form 5329, but no Form 5329 attached, correspond with the taxpayer either by phone or letter requesting the Form 5329.

    • If a response is received, follow the procedures below to establish the MFT 29 module and assess the tax.

    • If no response is received, prepare a dummy 5329 and edit the amount from the Form 1040X to the dummy Form 5329. Follow the procedures below to establish the MFT 29 module and assess the tax. Input the adjustment to reflect the primary taxpayer if a determination cannot be made.

  5. The following conditions require establishing an MFT 29 module if one does not currently exist:

    • A Form 5329, with entries in Parts III - VIII, received with Form 1040X or amending an originally filed Form 1040.

    • A loose Form 5329, with entries in Parts III - VIII, received without a Form 1040 filing (taxpayer is not liable for filing Form 1040. This includes statute years.)

      Note:

      Do not push code loose Forms 5329. TC 930 is not valid for IRAF MFT 29 modules. Establish the IRAF MFT 29 module following the procedures below.

  6. Follow these procedures to establish an MFT 29 module with the input of a TC 971 AC 144 on a MFT 30 account:

    1. Determine if there is an entity on IMF. If none exists, establish an entity by inputting a TC 000 on CC ENMOD. Monitor for posting of the entity; once posted follow procedures below.

      Note:

      If multiple Forms 5329 are received, establish the entity by inputting TC 000 on CC ENMOD, using the tax period for the earliest Form 5329 received.

    2. On the IMF MFT 30 account, input a TC 971 AC 144 for the tax period as shown on Form 5329. A TC 971 AC 144 cannot be input to MFT 29. It will generate on the MFT 29 account when input to the corresponding MFT 30 tax year.

    3. When inputting TC 971 AC 144 to the IMF MFT 30 account include the cross reference (XREF) Social Security number (SSN) (as shown on Form 5329). The XREF MFT 29 tax period will generate (the same tax period as the MFT 30). It is possible to input two TC 971 AC 144 transactions on the same MFT 30 module (one for the primary SSN and one for the secondary SSN).

      Exception:

      If the Form 5329 is for the secondary SSN on a joint return, compare the Form 5329 name control with CC INOLES IMF name control. If the name control does not match, to avoid unpostable code 169-9, follow procedures in (d) below.

    4. If Form 5329 is for the secondary SSN, compare the Form 5329 name control with CC INOLES IMF name control. If the name control does not match CC INOLES input a TC 971 AC 144 on MFT 30 for the secondary SSN, for the same tax period as shown on Form 5329. Do not input TC 971 AC 144 to the MFT 30 for the primary SSN. Continue with procedures in (e) - (j) below.

      Note:

      For these types of cases, it may be necessary to establish an entity on CC ENMOD with TC 000 for the name as shown on Form 5329 (if the IMF name control is a mismatch and an IMF entity with this name control is not present). This will allow an MFT 29 module to generate with the name control as shown on Form 5329.

    5. The received date is required input for TC 971 AC 144. Use the Form 5329 received date for input of the TC 971 input date. This posts on the MFT 29 module as the TC 150 .00 date and establishes the Form 5329 ASED.

      Note:

      If a Form 5329 is received without the original Form 1040, the ASED begins with the posting of the MFT 29 TC 150 date. The ASED is the due date of the return or the date of filing (received date), whichever is later. If Form 1040 and Form 5329 are received and processed at the same time, the MFT 29 and MFT 30 ASED are the same.

    6. Input the TC 290 amount on IRAF, MFT 29, with the corresponding IRAF abstract codes, for the taxpayer on the Form 5329. Refer to IRM 21.6.5.4.11.2, Individual Retirement Account File (IRAF) Abstract Numbers, for a list of related codes.

    7. Input a posting delay code for 3 cycles. This allows the MFT 29 module to generate from the input of the TC 971 AC 144 on the MFT 30 module. The MFT 29 module will post with a TC 150 .00 and TC 971 AC 144.

    8. If a subsequent adjustment is needed to abate tax (usually from a waiver request for excess accumulations tax), input TC 291 amount on IRAF, and hold code 3, MFT 29 with the corresponding IRAF abstract codes. Input posting delay code for 4 cycles. Refer to IRM 21.6.5.4.5, Excess Accumulations, for information regarding this type of excise tax.

      Note:

      In 2006, the instruction to include payment for the excise tax on excess accumulations, when submitting a waiver, was deleted from the Publication 590.

    9. SCs and RCs cannot post to MFT 29 modules. Do not input SCs or RCs on MFT 29 adjustments. For information on hold codes, refer to IRM 21.5.2.4.15, Rules on Hold Codes (HC).

    10. Send appropriate letter to the taxpayer and explain the actions taken.

  7. Use extreme caution when inputting these transactions. The MFT 29 module (with a TC 150) may have been established based on previous input of a dummy Form 1040 with a Form 5329 sent through processing. A subsequent TC 290 and IRAF abstract codes (based on input of TC 971 AC 144) will also post. This would create a duplicate assessment.

21.6.5.4.11.5  (05-25-2006)
Individual Retirement Account File (IRAF) Entity

  1. An Individual Retirement Account File (IRAF) adjustment or credit transfer will not post unless an entity is established on the IRAF for a particular module.

  2. An IRAF entity is established when a Form 5329 posts as a TC 150 and is updated when a later return posts.

    • The name line from Form 5329 is transcribed.

    • All other entity data is extracted from the IMF.

21.6.5.4.11.6  (05-25-2006)
IMF Tax Adjustments

  1. The additional 10 percent tax is adjusted on the IMF account for:

    • Form 5329, Part I, Additional Tax on Early Distribution.

    • Form 5329, Part II, Additional Tax on Certain Distributions From Education Accounts.

  2. No adjustment is made to the IRAF (MFT 29) account.

  3. Determine if the 10 percent tax was included in the posted IMF (MFT 30) tax.

  4. Determine if income from Form 5329, Parts I or II was included as income on the tax return.

  5. Consider changes to income tax and/or the 10 percent tax.

  6. Determine if an IMF tax adjustment is needed.

    If Then
    No adjustment is necessary Input TC 290 .00 on the IMF (MFT 30) account.
    An adjustment is necessary
    1. Input TC 29X on the IMF account using reason code (RC) 048, the appropriate blocking series and source code (SC).

    2. Attach source documents (e.g., Form 1040X, original Form 5329, taxpayer correspondence, etc.) behind the IMF adjustment document.

21.6.5.4.11.7  (05-25-2006)
Individual Retirement Account File (IRAF) Tax Adjustments

  1. The additional tax (excise tax) on excess contributions to Traditional IRAs, Roth IRAs, Coverdell ESAs, Archer MSAs, and HSAs from Form 5329, Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts Parts III, IV, V, VI, and VII is adjusted on the IRAF, MFT 29.

  2. The additional tax on excess accumulation in qualified retirement plans from Form 5329, Part VIII, is adjusted on the IRAF, MFT 29.

    • Ensure an entity for the particular module is present or established prior to taking any adjustment action.

    • Verify that the impact on both the IMF (MFT 30) and IRAF (MFT 29) modules was considered.

    • Use TC 29X with appropriate item abstract number to adjust an established module on IRAF MFT 29. Refer to IRM 21.6.5.4.11.2, Individual Retirement Account File (IRAF) Abstract Numbers, for definitions of the abstract numbers.

    • The TC 29X amount must equal combined Abstract Numbers 160, 162, 194, 195, 233, 235, 236, and 237 amounts.

      Note:

      Abstract numbers 194 and 195 are not valid for tax periods after 199612.

  3. SCs and RCs cannot post to MFT 29 IRAF accounts. Do not use any SCs or RCs when adjusting MFT 29 IRAF accounts. For information on hold codes, refer to IRM 21.5.2.4.15, Rules on Hold Codes (HC).

  4. Transfer any remittance for IRAF using CC ADD/ADC 24. Refer to IRAF credit transfers below.

21.6.5.4.11.8  (10-01-2012)
Individual Retirement Account File (IRAF) Credit Transfers

  1. Transfer any additional credit using CC ADD/ADC24.

    If Then
    Assessing tax on IRAF (MFT 29) and the credit is available on IMF (MFT 30)
    1. Use CC ADD/ADC24 to transfer the credit to the IRAF module.

    2. Use TC 820 to debit IMF and TC 700 to credit IRAF.

    The actual IRAF payment or portion of the IRAF payment posted to IMF Use appropriate transaction codes to debit IMF and credit IRAF.
  2. Effective in January 2006, overpayments refund from IRAF (MFT 29) accounts. A TC 846 will systemically generate and post to IRAF (MFT 29) modules, providing freeze code conditions preventing a refund are not present. Offsets to any outstanding liabilities also apply to IRAF. Take the following action to transfer a payment from IRAF to IMF when applicable:

    If And Then
    The credit was created by a TC 896/796 offset The amount is available for application to IMF (MFT 30)
    1. Reverse the offset using CC ADD/ADC24.

    2. Use TC 792 to debit the IRAF (MFT 29) and TC 892 to credit IMF.

    3. Include spouse indicators "1" or "2" for joint accounts on the CC DRT24 format. Use the spousal indicator as posted on RTVUE (use definer RY to view one posted Form 5329 or RZ to view two Forms 5329 information) to avoid an unpostable condition.

    The credit was created by a payment posting to IRAF in error The amount is available for application to IMF Use appropriate transaction codes to debit IRAF and credit IMF.
  3. Send the appropriate letter to the taxpayer to explain the actions taken.

  4. If the credit was applied to the Unidentified or Excess Collection file, prepare documentation to move the payment to the IRAF account. Refer to IRM 21.5.7.3.6, Research Unidentified Remittances and Excess Collection File, for more information.

21.6.5.4.11.9  (05-25-2006)
Internal Individual Retirement Account File (IRAF Notices)

  1. Internal IRAF Notices generate to notify the campus that additional action or review of the IRAF module (MFT 29) may be necessary.

21.6.5.4.11.9.1  (10-01-2012)
IRAFASSESS Transcripts

  1. An internal IRAFASSESS transcript (formerly CP 320) generates to notify the campus that a manual review of the excess accumulation tax reported on Form 5329, Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts, Part VIII, Additional Tax on Excess Accumulation in Qualified Retirement Plans (Including IRAs), is needed.

  2. Taxpayers may request a waiver of the 50 percent excise tax by attaching an explanation that the excess accumulation was due to a reasonable error and steps were taken to remedy the situation. An IRA Condition Code 35 indicates a waiver request of tax on excess accumulation on a qualified retirement plan is present.

    Note:

    Refer to Publication 590, Individual Retirement Arrangements (IRAs), for information on waiver requests. In 2006, the instruction to include payment for the excise tax on excess accumulations, when submitting a waiver, was deleted from the Publication 590.

  3. IRA Condition Code 35 is visible on CC RTVUE, with definer RY or RZ (indicating two Form(s) 5329 are present). IRA Condition Code 35 is converted to Computer Condition Code (CCC) X and is visible on the MFT 29 account on CC IMFOLR.

  4. If the return was filed by paper, request the return if it is needed to see the waiver. If filed electronically, review using CC RTVUE and CC TRDBV. The taxpayer's explanation requesting the waiver of tax may be attached to electronic returns. It is visible by using CC TRDBV and accessing the taxpayer explanation page. Use the following procedures after reviewing the excess accumulation tax and waiver request:

    If Then
    An adjustment is necessary
    1. Use CC REQ54 to adjust IRAF, MFT 29 account.

    2. If the excise tax is waived, refund applicable payments.

    No adjustment is necessary
    1. Annotate IRAFASSESS transcript "No Action" .

    2. Refile Form 1040.

21.6.5.4.11.9.2  (05-25-2006)
CP 29

  1. A CP 29, Amended Return Posted, No Original, (formerly CP 329) is generated and an E- freeze is set when an amended return posts to IRAF with no original return (TC 150) present.

  2. Process the Form 5329 to the correct MFT 29 module.


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