Benefit and Compensation Changes Included in Fiscal Cliff Law
The Congress rung in 2013 with several changes important to benefit professionals. Following is a brief summary of provisions from the American Taxpayer Relief Act of 2012 (“ATRA”) specifically impacting benefits and compensation.
Social Security Payroll Holiday Expires
Two years ago, the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 reduced the Social Security tax rate on taxable income from 6.2% to 4.2%. This two percent “payroll holiday” expired on December 31, 2012. As a result, the employee Social Security tax rate increases to 6.2% beginning January 1, 2013. The Social Security wage base limit increases in 2013 to $113,700. The employer rate of 6.2% remains unchanged.
The IRS indicates that employers should begin using new withholding tables and correct the amount of Social Security taxes as soon as possible, but no later than February 15, 2013. The IRS issued an informational bulletin (Notice 1036) that includes the revised income tax and Social Security withholding tables, and related information to assist employers and payroll entities in this process.
In-Service Rollovers to Roth Accounts
The law extends the ability to make an in-service Roth conversion, as expanded by the Small Business Jobs Act of 2010 (see Highlights of the Small Business Jobs Act of 2010, Benefit Beat, October, 2010). Qualified 401(k) plans, 403(b) plans and 457(b) plans can provide for a transfer of money within the plan to a Roth account. The benefit of a Roth conversion is that an individual can, in effect, make a taxable rollover into a Roth account, thus making the distribution tax-favored; whereas, in a non-Roth account, the distribution is taxable. In many instances, it is attractive to a taxpayer to pay a tax now, rather than later when his/her tax rates might be higher.
It is important to remember that for an individual to make a Roth conversion, the qualified plan must provide for it. In addition, the plan must be amended by the end of the plan year to which the amendment will apply.
HR professionals should be aware that they may receive questions from their employees about conversions in their plans.
Dependent Care Tax Credit
The dependent care tax credit, which is currently $3,000 for one eligible child or disabled dependent, or $6,000 for two or more eligible children or disabled dependents, has been made permanent. This tax credit is used to offset qualified dependent care expenses paid by individuals in order to be gainfully employed.
The employer-sponsored dependent care assistance program maximum is not impacted by this law, and remains $5,000 ($2,500 for married employees filing separate returns).
For some individuals, the dependent care tax credit is preferable to the dependent care assistance benefit.
Qualified Adoption Assistance Expenses
ATRA makes the tax-favored qualified adoption assistance program (IRC §137) exclusion permanent. For 2012, the maximum exclusion was $12,650 and the AGI phase-out range was $189,710 to $229,710. For tax years beginning in 2013 and beyond, it is anticipated that these limits will be subject to IRS inflation adjustments.
Qualified Educational Assistance Expenses
Under a qualified educational assistance plan (IRC §127 plan), up to $5,250 in employer-provided graduate and undergraduate course expenses can be deductible by an employer and excludable from the employee’s wages. This exclusion expired December 31, 2012; however, the ATRA makes this exclusion permanent. Over the years, this provision has expired and been reinstated. It is welcome news to know this is now permanent.
It should also be noted that educational assistance for job-related courses are excludable and not subject to these limits.
Qualified Transportation Expenses
Under a qualified transportation benefit program (IRC Section 132(f)), certain transportation expenses, including van pooling, transit passes and parking, can be reimbursed by an employer and excludable from the employee’s income.
For 2012, the transportation expense limits were $125 for van pooling and transit passes, and $240 for qualified parking. The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 increased the van pooling and transit pass limit to match qualified parking limit. This provision expired December 31, 2011. The ATRA reinstates the ‘parity’ provision through 2013, and making it retroactive through 2012. It is unclear at this point whether there is any way to re-coup the added benefit for 2012; hopefully, future guidance will address this. It should also be noted that IRS inflation adjustments for qualified transportation limits have not been issued for 2013.
Qualified Charitable Distributions from IRAs
Individuals aged 70½ and qualified to take a minimum distribution from an IRA are permitted to make a charitable contribution of up to $100,000 per tax year. This provision applied to distributions made in tax years beginning no later than December 31, 2011. The ATRA reinstates this provision and applies to distributions made through December 31, 2013. The law includes a transition period to allow individuals to make a charitable contribution through January 31, 2013 that will count toward 2012. Further, any distributions taken in December 31, 2012 that are re-directed to charity by January 31, 2013 will be permitted.
ACA: CLASS Act Repealed
Long term care needs were addressed in the Affordable Care Act through the Community Living Assistance Services and Supports Act (CLASS Act). The Department of Health and Human Services (HHS) was charged with establishing a national, voluntary long term care insurance program beginning in 2012. HHS suspended implementation of this program in 2011 due to actuarial and solvency concerns (see CBIZ Health Reform Bulletin, ACA Updates: CLASS Act Suspended, 10/17/11). The ATRA permanently repeals this provision, with direction to continue seeking ways to address long term care needs.
The information contained in this Benefit Beat is not intended to be legal, accounting, or other professional advice, nor are these comments directed to specific situations.
As required by U.S. Treasury rules, we inform you that, unless expressly stated otherwise, any U.S. federal tax advice contained in this Benefit Beat is not intended or written to be used, and cannot be used, by any person for the purpose of avoiding any penalties that may be imposed by the Internal Revenue Service.