Year-End Tax Bill Provides Extensions and Expansions of Various Employee Benefits

January 7, 2013

Congress passed the American Taxpayer Relief Act of 2012 (the Act) on New Year’s Day and the president signed the Act into law the next day. The Act prevents income tax rate increases for most taxpayers. Included in the Act is a retroactive temporary increase in the income exclusion in the Internal Revenue Code (the Code) for employer-provided mass-transit and vanpool benefits. Additionally, certain employee benefits provisions in the Code that expired at the end of 2012 were reinstated and extended permanently. Finally, the Act allows plan sponsors to extend an in-plan Roth conversion option to a greater number of participants.

Temporary Increase in Exclusion from Income for Employer-Provided Mass-Transit and Vanpool Benefits

The Act temporarily increases the monthly exclusion from gross income (as well as from wages for FICA purposes) for employer-provided mass-transit and vanpool benefits from $125 to $240. The increase is effective retroactive to the beginning of 2012 and continues through the end of 2013. As a result, for these years the monthly exclusion for these types of benefits will be the same as the exclusion for employer-provided parking benefits (so-called “transit parity”). Because the $125 monthly exclusion was not changed until 2013, employers had to withhold income tax and FICA taxes on monthly mass-transit and vanpool benefits greater than $125 that were provided during 2012. The retroactive increase in the exclusion for these benefits for 2012 will be reflected on 2012 Form W-2s and affected employees will recover any extra withholding on their 2012 tax returns.

The mass-transit and vanpool exclusion for 2013 will be the same as the parking exclusion if there is an inflation adjustment for 2013, which is expected to be announced in the near future.

Expired Code Provisions Reinstated and Extended Permanently

The Act also reinstates and permanently extends the following three employee benefit provisions in the Code that had expired at the end of 2012:

  • Employer-provided educational assistance (undergraduate and graduate). An employee may exclude from gross income up to $5,250 for income and employment tax purposes per year of employer-provided education assistance, including assistance for graduate education.
  • Adoption assistance program exclusion. An employee may exclude from income up to $12,650 of adoption expenses paid by an employer adoption assistance program. The Internal Revenue Service is expected to announce the 2013 inflation-adjusted amount in the near future. 
  • Credit for employer expenses for child care assistance. A tax credit of up to $150,000 is available to employers for acquiring, constructing, rehabilitating or expanding property that is used for a child care facility.

Expanded Eligibility for In-Plan Roth Conversions

Under the Act, defined contribution plans that permit Roth contributions may now offer participants the option to convert any vested non-Roth amounts in their plan accounts into Roth amounts. Previously, such in-plan Roth conversions were available only for amounts that were otherwise distributable, such as on account of reaching age 59½. Plan sponsors wishing to do so may now amend their plans to make all vested assets in a participant’s non-Roth accounts eligible for Roth conversion. Any amount converted is subject to income tax, in the same manner as if rolled over to a Roth IRA.

Reduced Health FSA Limit for 2013 Remains

The 2010 Affordable Care Act reduced the maximum health FSA account contribution to $2,500 for 2013. This change was not impacted by the Act.

For further information on these matters, please contact the authors, Steve Kittrell and Jessica Sackin, or any other members of McGuireWoods’ employee benefits team.