The United States government narrowly avoided falling over the so-called “fiscal cliff” by enacting the American Taxpayer Relief Act of 2012 (“ATRA”). ATRA’s impact on tax rates has been covered extensively in the national media. ATRA also included several employee benefit provisions that are of interest to employers and their employees.
The employee benefit highlights of the legislation are:
- A permanent exclusion for employer-provided educational assistance. Under this provision, an employee may exclude from gross income up to $5,250 of employer-provided educational assistance for undergraduate- and graduate-level courses. The exclusion previously had a sunset date, which had been extended many times since it was originally enacted. The ATRA change provides employers with welcome assurance that employer-provided educational assistance will continue to be tax-advantaged (at least until Congress amends the provision again).
- A permanent exclusion for employer-provided adoption assistance at the increased levels enacted in 2001. The exclusion amount is indexed for inflation; it was $12,650 in 2012 and has been projected to be $12,970 for 2013. The exclusion begins to be phased out for employees whose adjusted gross income exceeds a relatively high indexed amount (projected to be $194,580 for 2013). Without the ATRA change, the adoption assistance exclusion would have reverted to the pre-2001 level of $5,000 ($6,000 for a special-needs child), and would have begun to be phased out for employees with adjusted gross income exceeding $75,000. The ATRA change provides employers with assurance that the more generous exclusion for employer-provided adoption assistance programs will remain in effect.
- A temporary extension (through the end of 2013) of an increase in the monthly exclusion for employer-provided mass transit and vanpool benefits. The ATRA extension will keep the exclusion for these benefits at the same level as the monthly exclusion for employer-provided parking benefits during 2012 and 2013. Without the change, the exclusion for mass transit and vanpool expenses would have reverted to $125 per month starting in 2012.
- A permanent employer tax credit up to $150,000 for a portion of the expenses incurred to acquire, construct, rehabilitate, or expand property used for a child care facility, and to provide child care resource and referral services for employees.
- A permanent extension of the increase in the dependent care tax credit. A taxpayer may claim a credit for a percentage of child care expenses for children under 13 and disabled dependents. In 2001, Congress increased the expenses eligible for the credit and also increased the credit percentage. ATRA makes these increased credit levels permanent. Amounts excluded from employees’ income under employer-provided dependent care assistance programs reduce the available tax credit dollar for dollar. As a result, the extension of the increased tax credit might affect employees’ participation in employer-provided dependent care assistance programs, and employers might need to modify employee communications that explain the relationship between these two tax benefits.
- A permanent extension of the increase in the earned income limitation for non-working spouses. In general, the employment-related child care expenses taken into account for purposes of determining the dependent care tax credit may not exceed the earned income of an employee or the employee’s spouse. If the spouse is a student or is disabled, however, the spouse is deemed to have a statutory minimum amount of earned income. ATRA made this increase in the earned income limitation permanent. Because the same earned income limitation also applies for purposes of the exclusion for employer-provided dependent care assistance, the ATRA change provides relief for disabled spouses and spouses who are full-time students under employer dependent care assistance plans as well.
- Defined contribution plans now may allow participants to convert pre-tax accounts into Roth accounts at any time. The amount converted would be subject to ordinary income tax in the year of conversion. Prior law permitted these conversions only if the participant was eligible to receive a distribution at the time of the conversion. This provision was added to the bill as a revenue raiser, but it could be an attractive option for participants who believe their tax rates in retirement will be higher than their current tax rates or who wish to avoid tax on future investment gains.
- The alternative minimum tax (“AMT”) personal exemption amounts are increased for the 2013 tax year and will be indexed for inflation in future years. This change is relevant to employees who exercise incentive stock options (“ISOs”), because the “spread” between an ISO’s exercise price and its fair market value on the exercise date must be included in income for purposes of determining income subject to the AMT.
Despite the controversy surrounding the fiscal cliff debate, ATRA is helpful legislation that provides “permanent” fixes for several popular employee benefit provisions that were scheduled to expire. It remains to be seen whether Congress will adjust these provisions again in order to raise revenue when it turns to the debate over the federal budget in a few months’ time.