- Impact of American Taxpayer Relief Act on Employer-Provided Benefits
- March 11, 2013
- Law Firm: Hinckley Allen Snyder LLP - Providence Office
After weeks of highly partisan negotiations, President Obama signed into law the American Taxpayer Relief Act (the "Act") on January 2, 2013, to address key elements of the fiscal cliff legislation - the combination of tax increases and spending cuts that kicked in with the New Year. While the legislation's most significant provisions include higher tax rates for high-income taxpayers and a payroll tax increase for working Americans, employers may need to address the Act's provisions affecting benefit and compensation programs ranging from Roth retirement plans to health care and qualified transportation benefits.
In-Plan Roth Conversions Expanded
The Act expands a qualified plan participant's ability to transfer amounts from traditional 401(k) plans, 403(b) plans and 457 plans to designated Roth accounts. Prior to the Act, plan participants were limited in their ability to make such transfers. Transfers to a designated Roth account were restricted to amounts "otherwise immediately distributable" from traditional defined contribution plans (i.e., amounts distributable upon normal retirement, termination of employment, or in-service distribution at age 59-1/2). Under the American Taxpayer Relief Act and effective for plan years beginning on or after January 1, 2013, participants are allowed to transfer any pre-tax vested account balances under a plan to a Roth account, whether or not immediately distributable. While employers are not required to offer plan participants the ability to make in-plan Roth conversions, employers that chose to offer this feature or to expand the availability of in-plan conversions must amend their plans accordingly.
Benefits Made Permanent
The favorable tax treatment associated with the following benefits was set to expire on December 31, 2012. The Act made these benefits permanent.
Educational Assistance: The Act permanently extends the educational assistance benefit and permits employers to pay or reimburse employees up to $5,250 for education costs relating to undergraduate and graduate education provided under qualified educational assistance plans pursuant to Internal Revenue Code Section 127.
Adoption Assistance: The Act permanently extends adoption assistance benefits and permits employers to provide assistance to employees for qualified adoptions up to specified dollar limits. For 2013, employees may exclude from gross income, qualified adoption assistance benefits in an amount up to $12,970 (adjusted annually for inflation). This income exclusion will be phased out. For example, in 2013 there is no income exclusion for taxpayers with modified adjusted gross income over $194,580.
Dependent Care Assistance: The Act permanently extends a maximum annual tax credit of $150,000 to employers that provide childcare services, such as operating a qualified childcare facility or contracting with a qualified childcare facility to provide childcare services to employees. Similarly, employees may exclude up to $5,000 from gross income under a qualified dependent care assistance program, provided that the amount does not exceed the lesser of the employee's income or the employee's spouse's income. For a married couple in which one spouse is a full-time student or incapable of self-care, such student or spouse is deemed to have income equal to the greater of actual earned income or an amount prescribed by statute. At least for now, the Act has frozen these amounts at $250 and $500, respectively.
Qualified Transportation Benefits
Under a qualified transportation fringe benefit program, employees are permitted to pay certain qualified commuting expenses on a pre-tax basis, up to a specified monthly dollar limit. The monthly limits in effect for 2012 were $125 for qualified mass transit benefits and $240 for qualified parking benefits. The Act increased the monthly limit for qualified mass transit benefits to $240 for 2012 and $245 for 2013. The increased limit is not permanent and extends through December 31, 2013.
The increase to $240 for 2012 is retroactive. An adjustment is available for qualified mass transit benefits paid in 2012 over the $125 per month cap and up to the new $240 per month cap, which may have resulted in an employee's overpayment of FICA taxes and Federal income tax withholding. To provide the retroactive adjustment for 2012, employers must take certain action specified by the IRS.
Employment Tax Credits
The Act extends numerous tax credits, including tax credits for employers hiring certain members of Indian Tribes and employers making differential wage payments to compensate employees who are now serving in active military service.
Tax-Free IRA Distributions for Charitable Purposes
Tax-free IRA distributions for charitable purposes are reinstated and temporarily extended. The distributions are permitted for IRAs held by taxpayers who are at least 70-1/2. The provision applies for distributions made in taxable years beginning after December 31, 2011, and it sunsets on December 31, 2013. Transition rules allow distributions made in January 2013 to count for 2012, and they allow individuals who took a distribution in December 2012 to contribute that amount to charity and count it as an eligible charitable rollover as long as it would otherwise meet the requirements.