'Fiscal Cliff' Law Affects Payroll Tax Withholding and Employee Benefits

Law addresses Roth 401(k) conversions, tuition assistance and transit subsidies, among other benefits

By Stephen Miller, CEBS Jan 2, 2013

On Jan. 1, 2013, Congress passed the American Taxpayer Relief Act, preventing the U.S. from going over the impending “fiscal cliff,” and the bill was signed into law the following day.

The legislation extends permanently a number of tax provisions that had already expired at the end of 2011 and 2012, revises tax rates on income for married couples filing jointly at $450,000 and single $400,000 of taxable income, modifies the estate tax and extends unemployment benefits, Medicare payments and farm subsidies. Additionally, the law delays the sequestration provisions established by Congress in 2011 until March 1, 2013. The delays to sequestration provisions will allow lawmakers time for further negotiations on deficit reduction and the extension of the debt limit or borrowing authority of the federal government.

Specifically, H.R. 8 contains a number of provisions of importance to the HR profession. The legislation:

  • Does not include an extension of the 2 percent payroll tax cut of the Social Security (FICA) employee tax on the first $113,700 of wages. The employee-paid portion of the Social Security FICA tax increased on all wage earners from 4.2 percent to 6.2 percent beginning Jan. 1, 2013. The portion of the tax paid by employers remains at 6.2 percent of employee wages, for a total Social Security FICA tax of 12.4 percent. The Internal Revenue Service has issued new tax withholding tables for employers.
    According to an IRS release, employers should start using the revised withholding tables and correct the amount of Social Security tax withheld as soon as possible in 2013 but not later than Feb. 15, 2013. For any Social Security tax under-withheld before that date, make the appropriate adjustment in workers’ pay as soon as possible but not later than March 31, 2013.
    (Also see the SHRM Online article "FICA's Bite: Wages Subject to Social Security Tax to Increase in 2013.")
  • Permanently extends employer-provided education assistance (Section 127 of the Internal Revenue Code), which allows an employee to exclude from income up to $5,250 per year in educational assistance at the undergraduate and graduate level regardless of whether the education is job-related. See "SHRM Advocacy Reflected," below.
  • Extends the increase in the monthly tax exclusion for transit and vanpool benefits through 2013. This provision restores the parity of the benefit to fund on a pretax basis public transportation (including trains, subways and buses) and vanpool expenses, up to the same limit as commuter parking expenses—$240 per month. On Jan. 1, 2012, the amount that could be set aside to cover parking costs as part of a commute to work increased from $230 to $240 per month due to a cost of living adjustment. At the same time, the pretax limit on benefits for public transportation commuters fell from $230 to $125 per month.
    The new law makes the $240 per month limit on transit costs retroactive to January 2012, but advocates said it was unclear how crediting commuters for costs not covered in 2012 would work. [On Jan. 11, 2013, the IRS released procedures for employers to follow regarding FICA taxes that were withheld for monthly transit benefits paid to any employee in 2012 that fell between $125 and $240 per month; see the SHRM Online article IRS Procedures for Retroactive Increase in Transit Benefits.
    Moreover, since the provision is in effect only through December 2013, Congress would still need to act in order to guarantee permanent parity between transit and parking costs in the future.
    Employers generally can exclude the value of transportation benefits from employees’ wages, pretax, up to the IRS limits. As employees save money, so do employers through reduced payroll taxes that can offset the cost to implement a benefits program. Alternatively, employers can offer subsidized commuter benefits outright as an employee benefit. (Also see the SHRM Online article "Commuting: Transportation Benefits as Competitive Advantage.")
  • Makes permanent the income exclusion for employer-provided adoption assistance benefits and the expansion of the adoption tax credit made by the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA). The benefit limit is still $10,000.
  • Makes permanent a tax credit for employers that provide child-care services that had been subject to a sunset provision under EGTRRA.
  • Permits participants in pretax 401(k)s, 403(b)s and similar defined contribution retirement plans to elect to transfer amounts to a designated Roth 401(k) account, if available in their plan, at any time, with the transfer treated as a taxable qualified rollover contribution. While participants must pay income tax on funds transferred to the Roth 401(k) account, disbursements from the Roth account paid during their retirement years are made tax-free.
    Employers must amend their plans to allow for in-plan Roth 401(k) conversions. Previously, converting funds from a pretax to a Roth 401(k) account was limited to money that was already "distributable" without penalty from the pretax plan—typically when an employee reached age 59½ or terminated employment, unless the plan otherwise allowed in-service distributions. (Also see the SHRM Online articles "Legislation Provides Roth Conversion Opportunity" and "The Roth 401(k): A 'value Add' for Your Employees.")
  • Extends federal emergency unemployment benefits for one year.
  • Reinstates and extends the Work Opportunity Tax Credit through 2013.
  • Reverses a $600 deduction in the $3,000 credit for child and dependent care that was set to take effect on Jan. 1, 2013. Certain changes to the income exclusion for dependent care assistance plan (DCAP) payments and the dependent care tax credit (DCTC) have been extended or made permanent, as have certain changes to the earned income credit and child tax credit.

SHRM Advocacy Reflected

SHRM was active throughout 2012 on a variety of important issues directly affecting the HR profession. Most recently, SHRM has taken the lead for the employer community before Congress on such issues as employer-provided education assistance, employer-provided onsite childcare and employer-provided retirement plans, which were all included in the American Taxpayer Relief Act of 2012.

SHRM has advocated for the past 10 years for the permanent extension of Section 127 and is co-chair of the Coalition to Preserve Employer Provided Education Assistance, a broad-based group representing business, labor and education organizations dedicated to making Section 127 a permanent tax benefit. Throughout 2012, SHRM communicated directly with members of Congress and their staffs, brought hundreds of SHRM members to Capitol Hill to share their views and expertise with congressional offices, and generated thousands of letters on critical issues. SHRM Vice President of Government Affairs, Mike Aitken in a letter urged Congress to pass a bill that would include provisions to support the HR profession and to avoid plunging over the fiscal cliff.

Stephen Miller, CEBS, is an online editor/manager for SHRM.

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