The Internal Revenue Service (IRS) and Social Security Administration have released the cost-of-living (COLA) adjustments that apply to dollar limitations set forth in certain IRS Code Sections. The Consumer Price Index rose enough since the third quarter of last year to warrant an increase in some indexed figures for 2013.
Social Security and Medicare Wage Base
For 2013, the Social Security wage base increases to $113,700 from $110,100 in 2012. Unless Congress acts to extend the current reduction in the tax rate for employee withholdings, they will increase to 7.65 percent in 2013 from the 5.65 percent withheld in 2012. The Social Security rate of 6.2 percent is applied to wages up to the maximum taxable amount for the year; the Medicare portion of 1.45 percent applies to all wages.
Indexed Compensation Levels
The indexed compensation levels for determining who is considered highly compensated or a key employee remains unchanged for 2013:
|Highly Compensated Employee||$110,000||$110,000||$115,000||$115,000|
|Top Paid Group of 20%||$110,000||$110,000||$115,000||$115,000|
|Key Employee, Officer||$160,000||$160,000||$165,000||$165,000|
In 2013, the maximum for elective deferrals increases to $17,500. The catch-up contribution for those 50 or older remains at $5,500 for 2013 (no change from 2012). That means if you are age 50 or over during the 2013 taxable year, you may generally defer up to $23,000 into your 401(k) plan.
We have an additional indexed figure to track starting in 2013. It’s the annual limit for participant salary reductions for the health flexible spending account (FSA). For plan years starting on or after January 1, 2013, the participant salary reduction amount to the cafeteria plan’s health FSA portion of the plan may not exceed $2,500. This cap does not include employer contributions. However, employer flex credits that may be converted to cash must be added to the participants' health FSA elections.
Unless Congress acts, this tax credit will expire at the end of 2012. Parts of the adoption tax credit, under IRS Code Section 23, will expire on December 31, 2012. The remaining section of Code Section 23 will allow for a $10,000 credit for adoption of a child with special needs, regardless of expenses.
A "special needs" adoption, which becomes final during a taxable year, will be deemed to have qualified expenses in an amount equal to the excess (if any) of $10,000 over the aggregate qualified adoption expenses actually paid or incurred.
There will be no adoption-related benefits allowed under a cafeteria plan arrangement starting January 1, 2013, unless Congress updates current legislation.
Because the credit is set to expire at the end of 2012, no indexed figures were released for the 2013 taxable year.
Health Savings Account (HSA)
Minimum deductible amounts for the qualifying high deductible health plan (HDHP) increase to $1,250 for self-only coverage and $2,500 for family coverage in 2013. Maximums for the HDHP out-of-pocket expenses increase to $6,250 for self-only coverage and $12,500 for family coverage.
Maximum contribution levels to an HSA also increased for 2013 to $3,250 for self-only coverage and $6,450 for family coverage. The catch-up contribution allowed for those 55 and over is set at $1,000 for 2013. Remember, qualifying HDHPs and no other impermissable coverage (such as coverage under another employer’s plan or from a health care flexible spending account that is not specifically compatible with an HSA) are required in order to fund an HSA.
Archer Medical Savings Account (MSA)
For a high deductible insurance plan that provides self-only coverage, the annual deductible amount must be between $2,150 and $3,200 for 2013. Total out-of-pocket expenses under a plan that provides self-only coverage cannot exceed $4,300. The annual deductible amount must be between $4,300 and $6,450 for a plan that provides family coverage in 2013, with out-of-pocket expenses that do not exceed $7,850.
Although new MSAs are not allowed, maximum contributions to an existing MSA that are attributable to a single-coverage plan is 65% of the deductible amount. Maximum contributions for a family-coverage plan are limited to 75% of the deductible amount. MSA contributions must be coordinated with any HSA contributions for the taxable year and cannot exceed the HSA maximums.
Dependent and/or Child Daycare Expenses
Just a reminder that although the daycare expense limit associated with a cafeteria plan is not indexed, the tax credit available through a participant’s tax filing was raised in 2003. The daycare credit must be filed on Form 2441 and attached to the 1040 tax filing form.
For 2013, unless Congress acts, the limits for the daycare tax credit expenses will be reduced and based on $2,400 of expenses covering one child and $4,800 for families with two or more children. If one of the parents is going to school full time or is incapable of self-care, the non-working spouse would be "deemed" as earning $200 per month for one qualifying child and $400 for two or more qualifying children. This "deemed" earned income is used whether a person is using the employer’s cafeteria plan or taking the daycare credit.
The cafeteria plan daycare contribution limit is $5,000 for a married couple filing a joint return, or for a single parent filing as "Head of Household." For a married couple filing separate returns, the limit is $2,500 each.
The daycare credit is reduced dollar for dollar by contributions to or benefits received from an employer’s cafeteria plan. An employee may participate in their employer’s cafeteria plan and take a portion of the daycare expenses through the credit if they have sufficient expenses in excess of their cafeteria plan annual election, but within the tax credit limits.
For a qualified long-term care insurance policy, the maximum non-taxable payment is now $320 per day for 2013.
Finally, by participating in a cafeteria plan, the participant will be lowering their income for theEarned Income Tax Credit (EITC). Check out the new limits in IRS Publication 596 "Earned Income Credit" and for more information about this tax credit.
The information contained in this memo is not intended to be legal, accounting, or other professional advice. We assume no liability whatsoever in connection with its use, nor are these comments directed to specific situations.