Employee Benefits Provisions in the 2012 Taxpayer Relief Act

Title:
Employee Benefits Provisions in the 2012 Taxpayer Relief Act
Publication:
The February 2013 Riker Danzig Tax and Trusts & Estates Update
Attorneys:
Practices:

Individual income tax provisions of the Act relating to employee benefits are described below:

“In-Plan” Roth Transfers Expanded.  Prior to passage of the Act, plan participants could convert their pre-tax plan accounts (such as 401(k) plan accounts) to Roth accounts, but only with respect to distributable amounts.  Under section 402A(c)(4)(E) of the Internal Revenue Code (the “Code”), as added by Section 902 of the Act, a participant in an “applicable retirement plan” may now elect to have any amount not otherwise distributable under the plan transferred to a designated Roth account maintained for the participant under the plan.  An “applicable retirement plan” includes a tax-qualified plan, a Code section 403(b) plan, a Code section 457(b) eligible deferred compensation plan and a qualified Roth contribution program under Code section 402A(b)(1)).  An “in-plan” Roth transfer will be treated as a plan distribution contributed as a qualified rollover contribution (within the meaning of Code section 408A(e)) to the Roth account.  A plan allowing such transfer will not be treated as violating the distribution provisions of Code section 401(k)(2)(B)(i), 403(b)(7)(A), 403(b)(11) or 457(d)(1)(A).  Any amounts so transferred will be subject to regular income tax in the year of transfer.  As a result, new Code section 402A(c)(4)(E) is expected to generate a significant amount of revenue (which may explain the reason for its addition to the Code).  The new “in-plan” Roth transfer provisions apply to transfers after December 31, 2012, for tax years ending after that date.

Tax-Free Charitable IRA Distributions Extended.  Section 208 of the Act extends for a two-year period the provisions of Code section 408(d)(8)(F) that permit a tax-free distribution of up to $100,000 from an Individual Retirement Account (“IRA”) to a qualifying charity by individuals over age 70 ½.  These provisions were set to expire for tax years after 2011, but the Act retroactively reinstates these provisions so that relief is available for any “qualified charitable distribution” (as described in Code section 408(d)(8)(B)) from an IRA made in tax years beginning before January 1, 2014.  Under the Act, any qualified charitable distribution made after December 31, 2012, and before February 1, 2013, will be deemed to have been made on December 31, 2012.  Further, any portion of a distribution from an IRA after November 30, 2012, and before January 1, 2013, may be treated as a qualified charitable distribution to the extent that (i) such portion of the IRA distribution is transferred in cash to an eligible charitable organization (as described in Code section 408(d)(8)(B)(i)) before February 1, 2013; and (ii) such portion is part of a distribution that would meet the requirements of Code section 408(d)(8) but for the fact that the distribution was not transferred directly to an eligible charitable organization (as described in Code section 408(d)(8)(B)(i)).  Code provisions permitting qualified charitable distributions have previously been renewed several times for two-year periods (most recently in December 2010, for 2010 and 2011 tax years). 

Parity Extended for Excludable Employer-Provided Mass Transit and Parking Benefits.  Section 203 of the Act amends Code section 132(f)(2) to extend parity for exclusion from income for employer-provided mass transit and parking benefits.  For 2011, employees were permitted to exclude from gross income up to $230 per month in employer-provided mass transit and parking benefits.  For 2012, the exclusion rose to $240 for parking, but fell to $125 for employer-provided transit and vanpooling benefits.  This created a disparity with other qualified transportation fringe benefits, which were scheduled to continue for post-2012 years.  The Act retroactively extends the increase in the monthly exclusion for employer-provided transit and vanpool benefits so that the exclusion is equal to that for employer-provided parking benefits both for 2012 and 2013 ($240 monthly).  In Notice 2013-8, the IRS provides a special administrative procedure for employers to use in filing Form 941 (Employer’s Quarterly Federal Tax Return) for the fourth quarter of 2012 to reflect changes in the excludable amount for transit benefits provided in all quarters of 2012 and in filing Forms W-2 (Wage and Tax Statement).  For 2013, the exclusion is $245 per month. 

Exclusions Extended for Employer-Provided Educational Assistance and Adoption Assistance.  Section 101(a) of the Act permanently extends (i) the exclusion from gross income under Code section 127 for educational assistance to an employee up to a certain annual dollar amount with respect to expenses paid or reimbursed by an employer under an employer-provided educational assistance program; and (ii) the exclusion from gross income under Code section 137 for adoption assistance to an employee up to a certain annual dollar amount with respect to qualified adoption expenses paid or reimbursed by an employer under an employer–provided adoption assistance program.  Both of these provisions were scheduled to expire for post-2012 tax years.  The extensions to Code sections 127 and 137 apply to tax, plan or limitation years beginning after December 31, 2012.