The eleventh hour agreement to avoid the precipitous tax hikes and spending cuts widely known as the “fiscal cliff” will still require employers to make some changes to their current practices, and leaves many questions unanswered. Notably, the deal delays – but does not resolve – the matter regarding the “sequestration” of federal funds, which could trigger mass layoffs or furloughs of federal contract employees. The final deal arrived at on January 1, 2013 – the American Taxpayer Relief Act of 2012 (H.R. 8) (pdf) – postpones this possibility an additional two months. The bill does, however, extend certain tax relief measures, while letting others expire. Highlights of the fiscal cliff deal are as follows:

  • Tax cuts extended for individuals earning up to $400,000 and on families making up to $450,000.
  • The estate tax will rise from 35 to 40 percent, with the first $5 million in assets exempted.
  • Permanent Fix for Alternative Minimum Tax.
  • Payroll Taxes Will Increase. The bill allowed the temporary 2% payroll tax cut to expire at the end of 2012. In February the President had signed into law the Middle Class Tax Relief and Job Creation Act of 2012, which, among other things, extended through 2012 the reduction (to 4.2%) in the employee-paid portion of social security payroll taxes. The fiscal cliff deal allows payroll taxes to return to 6.2% on wages up to $113,700.
  • Unemployment Benefits Extended. The deal will extend emergency unemployment insurance benefits – which had been slated to expire at the end of 2012 – an additional year.
  • Commuting Expenses Income Exclusion Extended. The measure extends through January 1, 2014 the exclusion from income of employer-provided mass transit and parking benefits.
  • Doc Fix Extended. The bill delays by one year the 27% planned cut of Medicare reimbursement rates to doctors, commonly known as the “doc fix” provision.
  • Business Tax Breaks Extended. Sections 301 through 331 of the bill detail a number of business tax breaks that will be extended. Among these tax breaks is the bonus depreciation on the purchase of capital equipment; employer wage credit for employees who are active duty members of the uniformed services; and the work opportunity tax credit.
  • CLASS Act Repealed. The bill formally repeals the long-term care component in the Affordable Care Act. In early 2012 the House voted to repeal the Community Living Assistance Services and Supports (CLASS) Act, which would have created a national, voluntary program for individuals to purchase long-term care benefits in the event they become functionally disabled. The Department of Health and Human Services (HHS) had already abandoned the program after concerns about its financial viability were raised.

The fiscal cliff bill passed the Senate by an overwhelming 89-8 margin. However, the House approved the bill by a tighter 257-167 margin, with the majority of Republicans opposing it. While the deal delays sequestration until March 1, 2013 unless Congress acts otherwise, the new Congress faces perhaps an even bigger looming battle over spending cuts as it tackles the debt limit increase.

Littler’s Workplace Policy Institute has issued additional guidance on the fiscal cliff deal.