As congressional leaders and President Obama attempt to hammer out a deal to prevent the nation from going over the “fiscal cliff” — a series of tax hikes for individuals and businesses that economists say could imperil the fragile recovery — HR/benefits professionals can prepare now, write benefit attorneys Diane Morgenthaler and Ruth Wimer, partners at law firm McDermott Will & Emery. Just in case we go over the “fiscal cliff,” Morganthaler and Wimer’s report outlines four benefit and payroll areas that should be top of mind for practitioners.
The 2% payroll tax cut from 2011 and 2012, which lowered employees’ Social Security payroll taxes, will expire, effective Jan. 1. Although the increase is on employee contributions, the increase also affects an employer’s withholding obligations, Morgenthaler and Wimer note. At the same time, they write, a new 0.9% Medicare payroll tax increase applies (from 1.45% to 2.35%) under the Patient Protection and Affordable Care Act on wages over $250,000 for married taxpayers filing jointly and $200,000 for single taxpayers. Again, though this increase is not an employer liability, employers must be prepared to withhold the additional 0.9% from wages for any employee with wages over $200,000.
The income tax exclusion for amounts paid by an employer under a qualified adoption assistance program is also set to expire on Dec. 31, Morganthaler and Wimer write. A qualified adoption assistance program allows an employer to reimburse an employee on a tax-free basis for as much as $12,650 in 2012 for expenses related to the adoption or attempted adoption of a child. Qualified adoption expenses include reasonable and necessary adoption fees, including court costs, attorney fees, traveling expenses and other direct adoption-related expenses.
Under PPACA, employee contributions to health care flexible spending accounts will be reduced to $2,500 per year for plan years beginning in 2013, the attorneys note. This new limit must be documented in a flexible benefits plan by Dec. 31, 2014, regardless of the fiscal year of the flexible benefits plan, and this change must be retroactive to the beginning of the 2013 plan year.
Certain reimbursements for employer-provided educational assistance will expire at the end of 2012. Section 127 of the Internal Revenue Code allows an employer to reimburse an employee on a tax-free basis up to $5,250 for certain educational expenses provided through a non-discriminatory educational assistance program. Even if employer-provided educational assistance programs no longer have tax subsidies in 2013, employers can still provide some type of educational reimbursements in a more limited manner if the educational reimbursements qualify as a business expense and meet certain requirements, such as enhancing the employee’s performance but not qualifying the employee for a new position or career.
With the uncertainty of the approaching fiscal cliff, Morganthaler and Wimer write that employers should consider advising employees of the ambiguity surrounding educational assistance and adoption assistance benefits for 2013 and the possibility of a 2% payroll tax increase. Even if tax extensions for education assistance, adoption assistance and the 2% payroll tax increase are adopted in a new tax bill, the attorneys say employers should note that it is unlikely that the new limits on health care flexible spending accounts and/or the new 0.9% payroll tax increase for high-income employees will be altered or eliminated.