Earlier this year, Congress passed legislation making permanent the tax-favored treatment of certain benefits (tuition assistance and adoption assistance), raising the transit reimbursement amount, and making other changes. Minnesota’s legislature, however, failed to amend Minnesota’s state tax law to incorporate these changes for 2013. As a result, employer-provided tuition assistance and adoption assistance benefits will not be subject to federal taxes, but will be subject to Minnesota state taxes in 2013. Employers should review their payroll practices to confirm they are complying with Minnesota state tax law.
With respect to federal taxes, the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) contained a number of changes to benefit programs, but (due to budgetary constraint) many of the changes were designed to sunset at the end of 2010. At the end of 2010, Congress extended many of the changes for two more years. See Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010. The provisions at issue included:
- Tuition assistance (section 127). Prior to EGTRRA, section 127 contained a provision that this section (allowing employer-provided tuition assistance for general courses) would expire as of December 31, 2001. See 26 U.S.C. § 127(d) (2000). EGTRRA repealed this. In addition, prior to EGTRRA education assistance under section 127 could not be used for graduate-level programs. See 26 U.S.C. § 127(c)(1) (2000). EGTRRA also repealed this limitation.
- Adoption assistance (section 137). Prior to EGTRRA, section 137 contained a provision that this section (allowing employer-provided adoption assistance) would expire as of December 31, 2001. See 26 U.S.C. § 137(f) (2000). EGTRRA repealed this. In addition, prior to EGTRRA section 137 provided an employer may offer an adoption assistance credit of $5,000 ($6,000 in the case of a child with special needs). See 26 U.S.C. § 137(b)(1) (2000). EGTRRA increased the amount of the credit and also doubled the income limitations.
The American Taxpayer Relief Act of 2012 (ATRA), signed on January 2, 2013, amended the Code so that:
- Tuition assistance (section 127) was made permanent and the inclusion of graduate-level programs was retained.
- Adoption assistance (section 137) was made permanent and the increased amounts were retained.
In addition to making the above benefits permanent, ATRA also made other changes:
- Transit. For 2013, ATRA increased the monthly limit for mass transit commuting expenses to $245. Note: This increase expires at the end of 2013.
- Retirement benefits. ATRA expanded the allowable forms of in-plan Roth contributions.
ATRA, however, caused federal and state tax laws in certain states, such as Minnesota, to diverge. This is because Minnesota is a state where the legislature must act to update the state tax law when there is a change at the federal level. Minnesota’s state tax law provides Minnesota state taxes are based on the Internal Revenue Code as amended through April 14, 2011 (subject to certain adjustments). The legislature amended this date to bring it forward to January 3, 2013, but only for the 2012 tax year. See 2013 Minn. Laws, Chapter 3, Section 3 (H.F. No. 6) (available here).
Because the legislature failed to apply this date past 2012, 2013 Minnesota state tax law does not incorporate the changes made by ATRA.
The Minnesota legislature is not scheduled to meet again until February 25, 2014. It is possible the Governor will call a special session in 2013 and that the special session will address this issue. If not, an employer that provides the benefits listed above will need to report the value of the benefits as income, withhold, and remit Minnesota state taxes on the value of these benefits.
Minnesota’s Department of Revenue has provided information on its web site to help employers understand the taxation of some of the affected benefits. Information is available regarding:
Because in-plan Roth conversions result in additional tax revenue and Minnesota is likely in the future to adopt this change, it is unlikely that the Minnesota Department of Revenue will take action with respect to an employer or employee regarding expanded in-plan Roth conversions.
Employers also need to consider other states. Some states, such as Iowa, have conformed their state tax law to federal tax law. Other states, such as Washington and South Dakota, do not have an income tax and, therefore, there is no state tax issue.
Minnesota employers may wish to contact the Governor and legislative leaders to ask that this issue be addressed if there is a special session.