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

News Updates

On Jan. 1, 2013, Congress passed the American Taxpayer Relief Act of 2012 (H.R. 8), preventing the U.S. from going over the impending “fiscal cliff,” and President Barack Obama signed the bill 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 27, 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.

(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. 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.")

  • 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 first 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 article "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.

SHRM Advocacy Reflected

Stephen Miller, CEBS, is an online editor/manager for SHRM. To read the original article, please click here.