Earlier this month,
President Obama signed into law the American Taxpayer Relief Act of
2012 ("ATRA"). ATRA was enacted to address the combination
of tax increases and automatic spending cuts (widely known as the
"fiscal cliff") that were set to take effect in 2013.
Several provisions of ATRA make important changes that impact
employer-provided fringe benefits. These changes are highlighted
Benefits. Before January 1,
2012, a parity rule for mass transit benefits (and van pool benefits)
made the monthly exclusion limit equal to the limit for the qualified
parking benefits exclusion. On January 1, 2012, the parity rule
expired and the monthly mass transit/van pool limit fell to $125,
while parking benefit limits remained at $240. ATRA restores the
parity rule for 2013, and the limits for parking benefits and mass
transit/van pool benefits will both be $245 per month.
ATRA also retroactively
increases the 2012 mass transit/van pool benefit exclusion to $240.
As a result of this retroactive increase, monthly transit benefits
provided to employees in 2012 in amounts between $125 and $240 are
now excludable from taxable income. Employers are now required to
correct any excess FICA withholding that resulted and amend affected
employees' 2012 Forms W-2 to correct federal taxable income amounts.
The IRS recently issued Notice 2013-8 to help employers comply with
and implement the retroactive increase.
Assistance Benefits. The income
exclusion for employer-provided adoption assistance benefits was set
to expire at the end of 2012. ATRA permanently restores the exclusion
for qualified adoption assistance benefits. For 2013, the maximum
adoption assistance benefit is $12,970 (a $320 increase over the 2012
Assistance Programs. The income
exclusion for benefits provided under a qualified education
assistance program was also set to expire at the end of 2012 because
of a sunset provision. ATRA strikes the sunset provision and
indefinitely extends the income exclusion for qualified educational
assistance benefits. For 2013, the maximum amount of qualified
educational assistance benefits that may be excluded remains at
Assistance Plans ("DCAP"). For 2013, the overall DCAP exclusion limit for
married employees remains at the lesser of $5,000 or the lower of the
employee's or the spouse's earned income. If an employee's spouse is
either a student or incapable of self-care, the spouse is deemed to
have a certain specified monthly income for DCAP purposes. For 2013,
these deemed amounts will remain at the 2012 levels (e.g.,
$250 per month for one child and $500 per month for two or more
children). Before ATRA's enactment, deemed income amounts were
scheduled to decrease to $200 and $400, respectively.
IRS Releases Revised
Guidance on Deductibility of Medical and Dependent Care Expenses
The IRS has released the
2012 editions of Publication 502, "Medical and Dental
Expenses" and Publication 503, "Child and Dependent Care
Expenses." Pub. 502 provides guidance on which medical expenses
are deductible under Internal Revenue Code Section 213, and
identifies medical expenses that may be reimbursed or paid by health
flexible spending accounts, health savings accounts, or health
Pub. 503 outlines the
requirements that taxpayers must satisfy to claim the dependent care
tax credit available under Code Section 21. Many of these
requirements also apply to dependent care flexible spending accounts.
Updates to 2012
Publications. While the 2012
Publications are substantially similar to their 2011 counterparts,
relevant dollar amounts have been revised to reflect their 2012
inflation adjusted values. In addition, the 2012 version of Pub. 502
provides taxpayers with the following new guidance:
explanation of the lodging expense rules as applied to
individuals travelling with the person receiving medical care,
- an updated
explanation of the health coverage tax credit.
The 2012 edition of Pub. 503
has been revised to include an example demonstrating how an employee
with two children can exclude $5,000 in dependent care assistance
plan reimbursements and also take a partial dependent care tax credit
based on $1,000 in additional dependent care expenses.