After weeks of difficult negotiations, Congress passed the American Taxpayer Relief Act (H.R.8) on January 1, 2013, to address key elements of the looming fiscal cliff - the combination of tax increases and spending cuts that would have begun January 1, 2013. While the legislation extends the Bush tax cuts for most taxpayers and eliminates the payroll tax reduction of the past few years for working Americans, the law also includes important provisions related to health care and qualified transportation benefits.
Qualified transportation benefits - monthly transit limit now $240
The American Recovery and Reinvestment Act of 2009 increased the monthly limit for employer-provided transit and vanpooling benefits to equal the limit for qualified parking benefits. This transit parity provision expired at the end of 2011. The American Taxpayer Relief Act retroactively reinstates the higher limit for 2012 and extends it through December 31, 2013. At this point, we'll need guidance from Treasury and the IRS about how to apply the retroactively increased limits and whether or not there will be an indexed amount from the $240 limit effective in 2012. The revised monthly transit limit of $240 has been reflected in the WageWorks system.
Educational assistance, adoption assistance and dependent care assistance benefits
The Act permanently extends the exclusion for employer-provided educational assistance under Internal Revenue Code Section 127, which allows taxpayers to exclude up to $5,250 annually in qualified tuition assistance for undergraduate and graduate education.
The exclusion for employer-provided adoption assistance was also made permanent. The limits (indexed) enacted by the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) will apply. For 2012, the exclusion was $12,650.
The EGTRRA increased the annual dollar limit on creditable expenses for the dependent care tax credit, increased the credit rate and raised the income level at which the credit phases out. Under the tax code, employees may exclude up to $5,000 in employer-provided dependent care assistance, but the exclusion may not exceed the lesser of the employee's earned income or that of the spouse. The Job Creation and Worker Assistance Act amended the EGTRRA to increase the amount of deemed earned income for spouses who are full-time students or unable to care for themselves. These provisions are permanently extended.
This permanent extension removes uncertainty for employers about these benefits - often they have sunset every year or two and require last-minute (or retroactive) attention from Congress.
CLASS Act repeal
The Patient Protection and Affordable Care Act (PPACA) established a voluntary, public long-term care program called the Community Living Assistance Services and Supports (CLASS) Act. In October 2011, the Department of Health and Human Services announced that the program would not be implemented because it was not financially sustainable. The American Taxpayer Relief Act repeals the CLASS program.