Pension Digest Alert
Economic Stimulus Payments Clarified
May 1, 2008

Economic Stimulus Payments

The recipient of a tax refund may have elected to have their refund amount deposited directly into their IRA, HSA, MSA, CESA or 529 plan. What they may not have realized, is that their Economic Stimulus Payment will be deposited to the same location.

If it was not your customer's intent to have their Economic Stimulus Payment put into one of these special tax preferred accounts, the IRS has made provisions for this amount to be removed, without any penalty or tax. We suspect this benevolence is to make it easy for the recipient to propel these dollars back into the economy.

CWF Comments

All IRA, HSA, MSA and CESA custodians/trustees are to document and report the contributions and distributions as they would have normally. Remember, until they are distributed, they are contributions. It will be the responsibility of the account owner to report the transaction correctly on his or her 2008 federal tax return. State income tax rules must be addressed individually by each state.

The IRS will need to clarify contribution reporting. It seems an individual making the maximum contribution and the stimulus payment that was not later removed, would be reported by the custodians/trustees as making an excess contribution.

What goes in...

On April 30, 2008, the IRS, in Announcement 2008-44, clarified how the Economic Stimulus Payments (ESP) are administered by the custodians and trustees if the tax refund payments, including ESP, were directly deposited to traditional IRAs, Roth IRAs, Health Savings Accounts (HSAs), Archer Medical Savings Accounts (MSAs), Coverdell Education Savings Accounts (CESAs), Qualified Tuition Programs (QTPs) or 529 Plans.

The incoming direct deposit are to be recorded by the IRA custodian, HSA custodian, etc. as any other contribution to the particular plan. All eligibility, documentation, and limitation rules for the contributions apply.

Can easily come out...

Special relief has been given so that an individual may withdraw an amount less than or equal to the amount of the Economic Stimulus Payment that was directly deposited without having to comply with the standard distribution rules. The amount withdrawn will not be subject to regular federal income tax nor to any additional tax or penalty under the internal Revenue Code. For the purposes of the individual's 2008 Federal tax return, the amount withdrawn will not be considered contributed to or distributed from the account. The withdrawal must be made by the due date of the account owner's 2008 federal tax return including extensions.

The announcement goes to state that the account custodians/trustees are to report the deposit and the distribution as they would any other contribution and distribution for the particular account. All regular distribution codes apply.

The IRS states that the taxpayer will receive instructions in his or her 2008 Form 1040 Package on how to report the distribution for federal income tax purposes so that no federal tax will be due.