To start off the new year, the U.S. Congress and the IRS have been at work on some important employee benefit-related regulations and tax legislation. The first changes come as part of the American Taxpayer Relief Act, which was passed over the New Year holiday with the tax-related elements of the fiscal cliff resolution. These changes include some important items related to employee benefits.
1. Permanent education benefits. There is good news for employers that provide educational assistance to their employees. After expiring and being reinstated multiple times, sometimes retroactively months later, the provision that allows employers to provide up to $5,250 annually in tax-free undergraduate and graduate educational costs to their employees has been renewed once again and is now permanent. This will no doubt be welcome news to employers and employees seeking advanced degrees who have been dealing with an unwelcome level of uncertainty about the tax status of this benefit.
2. Higher mass transit benefits. The new law also increases employees’ maximum pretax contribution to mass transit expenses from $125 per month to $240 per month. This provision will last only until December 31, 2013, unless it is extended again. However, the provision can be implemented retroactively to January 1, 2012, if employers are willing to deal with the administrative issues associated with such a move.
3. Roth 401(k) options. Companies that offer a Roth 401(k) in addition to a traditional 401(k) plan can now allow employees to convert their traditional 401(k) plan balances to a Roth 401(k) at any time. Unlike a traditional 401(k) plan, which allows pre-tax salary deferrals that will be taxed when withdrawn in retirement, a Roth 401(k) requires fully taxed contributions that are withdrawn tax-free in retirement. When an employee converts a traditional 401(k) to a Roth 401(k), that individual must pay applicable income taxes on the amount converted at the time of conversion. This new provision was included in the law as a revenue generator with the expectation that individuals will take advantage of this option. In the past, only employees who left their current company for retirement or a new job or who turned age 59-1/2 were able to undertake a conversion from a traditional to a Roth 401(k).
Separately, there is also some news involving health care reform. The IRS released regulations on the so-called shared responsibility penalties that take hold in 2014 for employers with 50 or more full-time employees that they must pay if they fail to offer health insurance coverage to those employees or if they offer health coverage that is unaffordable. In general, employers that fail to offer health coverage are subject to a $2,000 per-employee penalty and employers that do not provide coverage that is affordable are subject to a $3,000 penalty multiplied by the number of full-time employees who enroll in coverage offered by a public exchange and receive a premium tax credit.
Among other things, the regulations lay out and expand the safe harbors for determining affordability. The IRS has published a Q&A on the key issues covered in the regulations.