January 8, 2013
President Obama recently signed the American Taxpayer Relief Act of 2012 (ATRA), which affects the following flex and fringe benefit plans.
Employer-provided Educational Assistance
For income and employment tax purposes, an employee may exclude from gross income up to $5,250 per year for employer-provided education assistance.
Prior to 2001, this incentive was temporary and only applied to undergraduate courses; however, the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) expanded this provision to graduate education and extended the provision for undergraduate and graduate education. The recent ATRA legislation permanently extends the changes to this provision for taxable years beginning after December 31, 2012.
Dependent Care Credit
A taxpayer may receive a credit for an applicable percentage of child care expenses for children under age 13 and disabled dependents. The EGTRRA increased the amount of eligible expenses:
• For one child – from $2,400 to $3,000
• For two or more children – from $4,800 to $6,000
The EGTRRA also increased the applicable percentage from 30 percent to 35 percent. The ATRA permanently extends the changes to the dependent care credit made by EGTRRA for taxable years beginning after December 31, 2012.
Adoption Tax Credit and the Adoption Assistance Programs Exclusion
Taxpayers who adopt children can receive a tax credit for qualified adoption expenses. A taxpayer may also exclude from income adoption expenses paid by an employer. The EGTRRA increased the credit from $5,000 ($6,000 for a special needs child) to $10,000 and provided an income exclusion of $10,000 for employer-assistance programs.
The Patient Protection and Affordable Care Act of 2010 (ACA) extended these benefits to 2011 and made the credit refundable. For taxable years beginning after December 31, 2012, the ATRA permanently extends the increased adoption credit amount and the exclusion for employer-assistance programs as enacted in EGTRRA.
Employer-provided Transit and Parking Benefits
The ATRA also includes an extension of the employer-provided transit and parking benefits provision through 2013. In addition, legislation increases the monthly pre-tax limit for employer-provided transit and vanpool benefits from $125 to $240, which is now the same as the monthly pre-tax limit for employer-provided parking benefits.
Please note: The increase to employer-provided transit and vanpool benefits limits is actually retroactive to months after December 31, 2011 (i.e., retroactively effective for the 2012 calendar year). We anticipate the IRS will issue additional guidance on how to administer this retroactive provision, and if so, we will send a Compliance Update with that information.