On January 2, 2013, President Obama signed into law the American Taxpayer Relief Act of 2012 (the "Act"), commonly known as the "fiscal cliff" legislation. The Act has generated extensive public interest and media commentary, which have largely focused on the provisions relating to marginal tax rates, the alternative minimum tax, and the phase-outs of personal exemptions and itemized deductions for high-income taxpayers. This Client Alert supplements the existing commentary by focusing on the provisions of the Act affecting employer-sponsored benefit plans.
Specific Provisions
a. Extension of Education Assistance Programs
Under Internal Revenue Code ("Code") section 127, the gross income of an employee does not include amounts paid or expenses incurred by the employer for educational assistance to the employee if the assistance qualifies as an "educational assistance program" and does not exceed $5,250 per employee during a calendar year.
As part of the sunset provisions of the Economic Growth and Tax Relief Reconciliation Act of 2001 (commonly known as the "Bush-era tax cuts"), the availability of this benefit was scheduled to expire on December 31, 2012. By striking the sunset provisions of the 2001 legislation, the Act has extended indefinitely the exclusion from gross income for amounts received pursuant to educational assistance programs.
b. Parity of Mass Transit Benefits
Prior to January 1, 2012, a parity rule for nontaxable fringe benefits under Code section 132(f) set the combined monthly limit for qualified transit pass and vanpooling benefits at the same level as the monthly limit for qualified parking expenses. When this parity rule expired on January 1, 2012, the combined monthly transit limit fell to $125 while the monthly parking expenses limit remained at $240. Although the Act restores the parity rule retroactively to January 1, 2012, its primary effect will occur in 2013. These limits are subject to annual cost-of-living adjustments; the IRS has not yet announced the limits for 2013.
c. Extension of Qualified Adoption Assistance Programs
Under Code section 137, the gross income of an employee does not include amounts paid or expenses incurred by the employer for qualified adoption expenses in connection with the adoption of a child by an employee if such amounts are furnished pursuant to an adoption assistance program and do not exceed $12,650.
As with the education assistance programs discussed above, the availability of this benefit was schedule to expire on December 31, 2012 as part of the sunset provisions of the Bush-era tax cuts. By striking the sunset provisions of the 2001 legislation, the Act has extended indefinitely the exclusion from gross income for amounts received pursuant to qualified adoption assistance programs.
d. Expiration of Social Security Payroll Tax Cut
Pursuant to the "payroll tax holiday" enacted for calendar year 2011 and extended through the end of calendar year 2012, the employee's share of Social Security tax under Code section 3101 was reduced from 6.2% to 4.2% of income up to the Social Security wage base ($110,100 for 2012). Because the Act did not further extend the payroll tax holiday, withholding of the employee's share of Social Security tax returned as of January 1, 2013 to 6.2% of income up to the 2013 Social Security wage base of $113,700.
e. Expanded Availability of In-Plan Roth Rollovers
Prior to the Act, employees who were participants in employer-sponsored retirement plans such as 401(k), 403(b), and 457(b) plans that offered a Roth (i.e., after-tax) contribution option were permitted to roll over pre-tax account balances to Roth accounts under the employer plan prior to their separation from service with the employer only upon the occurrence of a specified in-service distribution event such as attainment of age 59-1/2 (or, the case of 457(b) plans, attainment of age 70-1/2). Pursuant to the Act, Code section 402A(c) has been amended to permit plans to allow such "in-plan Roth rollovers" regardless of whether an in-service distribution event has otherwise occurred. Retirement plans are not required to offer this option and must affirmatively adopt it if they wish to do so. Employees considering an in-plan Roth rollover should first consult their tax advisor in order to understand the tax implications specific to their situation.
Conclusion
As noted above, this Client Alert has focused on the employee benefits provisions of the Act.
This article is designed to give general information on the developments covered, not to serve as legal advice related to specific situations or as a legal opinion. Counsel should be consulted for legal advice.
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