The Employer's Legal Resource: Tax Tidbits For Employers As You Begin 2013
The American Taxpayer Relief Act of 2012 ("ATRA") (enacted January 2, 2013) made permanent most of the tax benefits that were due to expire at the end of 2012, added a few new ones, while, at the same time, raising rates and denying or restricting some benefits to certain "high income" taxpayers. The following describes some of those changes that may be of the most interest to employers.
Employee Benefits - 401(k) Plan Roth Accounts
Prior legislation allowed employers to add Roth accounts (similar to Roth IRAs) to their 401(k) plans. The addition of Roth accounts permitted plan participants to roll-over distributable amounts from their regular 401(k) accounts to their 401(k) Roth accounts.
The 2012 ATRA expands previous law by allowing participants to transfer account balances to a Roth account even though those amounts are not otherwise distributable to the participant. This allows those participants who wish to do so, to convert their regular 401(k) accounts into the equivalent of a Roth IRA.
As might be expected, this conversion option comes with a price. The participant is fully taxed on the transferred amount as though it had been distributed to him. Offering Roth accounts and the conversion option is not mandatory, so each plan sponsor will have to decide for itself whether its plan should be amended to provide these features. Such a plan amendment allowing the expanded "conversion" option would only be effective for transfers occurring after December 31, 2012.
Educational Assistance Plans
Prior law temporarily allowed employers to establish educational assistance plans to help employees pay for further education on a tax free basis. Although the law limited the amount of tax free assistance that could be provided to employees, such a plan could pay for undergraduate and graduate school costs, and the education received need not be job-related. These plans provided a double tax benefit since the employer can deduct its payments under the plan, and participating employees can exclude from their taxable income the assistance they received.
Although the authorization for these educational assistance plans was originally scheduled to expire at the end of 2012, the 2012 Act makes the prior law permanent for 2013 and beyond.
Parking and Transit Benefits
Prior to the 2012 ATRA, employers could provide employees a parking allowance that would be tax-free up to a monthly limit of $240 for 2012, and $245 for 2013.
Under the 2012 ATRA, two changes were made to this tax benefit that affect 2012, as well as 2013 and beyond. The new law retroactively increases the 2012 monthly limit for non-taxable parking benefits to $245. In addition, employer payments for transit expenses (e.g., train or bus passes) were made tax-exempt retroactively to 2012. For example, an employee who received in 2012, a monthly train pass allowance of $200 and a monthly parking allowance of $245 (to defray the park and ride expense), will now be able to exclude from income $2,400 for the transit benefit and $2,945 for the parking allowance.
An employer that does not wish to increase its out-of-pocket expenses might still offer these benefit through a salary reduction arrangement instead.
The increased limitation on tax-exempt employer adoption assistance payments and the increased income phase-out ranges that had been temporarily provided through 2012 were made permanent.
Miscellaneous Employer Tax Benefits Retroactively Extended
Several employment-related tax benefits for employers were retroactively extended for 2012 and 2013 only. Among them are the following:
The employer wage credit for employees who are active duty members of the uniformed services.
The Indian employment tax credit.
The work opportunity credit.
For the most part, the lower tax rates of 2012 became permanent under the 2012 ATRA. Taxpayers with income exceeding the "high income" threshold will have that income taxed at a higher rate than applied in 2012. For example, in 2013, single taxpayers whose income exceeds $400,000 and married taxpayers filing joint returns whose income exceeds $450,000, will be taxed at the highest marginal rate of 39.6% instead of the 35% rate in effect for 2012.
Beginning in 2013, the rate for qualifying dividends and long-term capital gains will be 0% if income falls below the 25% tax bracket; 15% if income falls at or above the 25% tax bracket but below the new 39.6% rate; and 20% if income falls in the 39.6% tax bracket. However, this is not the whole story. The rates for qualifying dividends/long-term capital gains do not include the new 3.8% Medicare surtax on investment income and gains that is effective for tax years beginning after 2012. When the two taxes are combined, the maximum rate increases from 20% to 23.8%, and the 15% rate increases to 18.8%.
For 2011 and 2012, the Social Security tax withholding rate on an employee's salary was temporarily reduced from the normal 6.2% to 4.2%, while the employer portion of the tax remained 6.2%. Likewise, the Social Security tax component of the self-employment tax was reduced from the normal 12.4% to 10.4%.
The 2012 ATRA does not extend the payroll tax cut beyond 2012. As a result, employees and self-employed individuals will owe an additional 2% in employment tax on their earnings up to the Social Security wage base (which is $113,700 for 2013).
Employer Withholding Requirements
In a recently issued information release (IRS 2013-1), the IRS issued revised income tax withholding tables for 2013 that reflect the new tax rates in effect for that year under the 2012 ATRA. The updated release supersedes the information previously issued by IRS on December 31, 2012.
The IRS also advised employers that they should begin withholding Social Security tax at the rate of 6.2% of wages paid following the expiration of the temporary two-percentage-point payroll tax cut in effect for 2011 and 2012. According to the IRS, employers should start using the newly revised withholding tables and applying the correct amount of Social Security tax as soon as possible in 2013, but not later than February 15, 2013. If any Social Security tax is under-withheld before that date, employers are to make the appropriate adjustment in employees' pay as soon as possible, but not later than March 31, 2013.
Although employees typically will not need to take any additional action (such as filling out a new Form W-4) — the IRS advised employees to review their withholding for 2013 and every year. If necessary, employees should fill out a new Form W-4 and give it to their employer. Likewise, employees expecting a refund at the end of the year may wish to consider submitting revised W-4 forms.
Circular 230 Disclaimer
This communication contains federal tax advice. However, IRS regulations require us to advise you that unless expressly stated otherwise, nothing in this communication was intended or written to be used and cannot be used or relied upon by any taxpayer to avoid any penalty under federal tax law or to promote, market or recommend any transaction or matter addressed herein. Only formal, written tax opinions meeting IRS requirements may be relied upon for the purpose of avoiding tax-related penalties. Please contact one of the Firm’s tax attorneys if you have any questions regarding federal tax advice.
By Varley S. Taylor, firstname.lastname@example.org