The American Taxpayer Relief Act of 2012 ("ATRA"), also known as the "fiscal cliff legislation," made a number of changes that impact employee benefit plans. These changes are summarized in the chart below and explained in more detail on the next two pages:
Click here to view table.
"In-Plan" Roth Conversions
Since 2010, certain retirement plans (such as 401(k) and 403(b) plans) may permit participants to convert certain pre-tax account balances into separate Roth accounts held under the plan. This feature is often referred to as an "in-plan" Roth conversion. Before ATRA was passed, "in-plan" Roth conversions were limited to amounts that were otherwise immediately distributable under the plan (such as amounts that are distributable when a participant reaches normal retirement age, terminates employment or is eligible for an in-service distribution from the plan such as after reaching age 59½) and that qualified as "eligible rollover distributions" under the Internal Revenue Code.
For plan years beginning in 2013, ATRA expands the availability of "in-plan" Roth conversions to any pre-tax vested account balances under the plan, including amounts that are not otherwise eligible for immediate distribution from the plan.
The "in-plan" Roth conversion feature remains optional; employers are not required to adopt this feature. Employers that wish to offer "in-plan" Roth conversions, or that wish to expand the availability of "in-plan" Roth conversions, must amend their plan documents to reflect this change.
Mass Transit Benefits
Since 1998, employees have been permitted to pay certain qualified commuting expenses on a pre-tax basis, up to certain dollar limits per month. The monthly limits in effect for 2012 were $125 for qualified mass transit benefits and $240 for qualified parking benefits. ATRA increased the monthly limit for qualified mass transit benefits to $240 for 2012 and $245 for 2013. The increased monthly limit for qualified mass transit benefits is not permanent, and applies only through December 31, 2013, unless Congress extends this limit.
Because the increase in qualified mass transit benefits was made retroactive to January 1, 2012, an adjustment is available for qualified mass transit benefits paid in 2012 over the $125 per month cap and up to the new cap of $240 per month for 2012. To provide a retroactive adjustment for 2012, employers must take certain action specified in Notice 2013-8, which can be found here.
Adoption Assistance Benefits
Since 1996, employers have been permitted to provide assistance to employees for qualified adoptions up to certain dollar limits per year. Qualified adoption assistance benefits are generally excludible from an employee's gross income. Qualified adoption assistance benefits were set to expire at the end of 2012. ATRA made this benefit permanent. For 2013, an employee may exclude from gross income expenses for qualified adoption assistance benefits in an amount up to $12,970 (this amount is adjusted annually for inflation). This income exclusion phases out for taxpayers above specified levels of modified adjusted gross income (MAGI), adjusted annually for inflation. For 2013, the phase-out begins for taxpayers with MAGI over $194,580 and is completely phased out for taxpayers with MAGI of $234,580 and above.
Educational Assistance Programs
Since 2001, employers have been permitted to pay or reimburse employees up to $5,250 for education costs provided under qualified educational assistance plans. Qualified educational assistance benefits are generally excludible from an employee's gross income. This benefit was scheduled to expire at the end of 2012. ATRA made this tax benefit permanent.
Child Care Benefits
Since 2001, employers that provide childcare services have been eligible for a tax credit for certain costs of providing childcare assistance to employees, such as operating a qualified childcare facility or paying for a contract with a qualified childcare facility to provide childcare services to its employees. The maximum annual allowable tax credit for such purposes is $150,000. This tax credit was set to expire at the end of 2012. ATRA made this tax credit permanent.
Also, since 2001, employees have been permitted to exclude under a qualified dependent care assistance program up to $5,000 from an employee's gross income, provided that the amount did 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. For 2012, this statutory amount was $250 per month if the married couple's family has only one "qualifying individual" (a dependent under age 13 or dependent spouse who is not capable of self-care) or $500 per month if the married couple's family has two or more "qualifying individuals" (dependents under age 13 and/or a dependent spouse who is not capable of self-care). These deemed income amounts were set to decrease to $200 and $400, respectively, in 2013. ATRA has maintained the amounts at the $250 and $500 levels, respectively.