American Taxpayer Relief Act of 2012: Expanded Roth Conversions and Other Benefit and Retirement Related Provisions

by King & Spalding
Contact

On January 2 , 2013, President Obama signed the American Taxpayer Relief Act of 2012 (H.R. 8) (the “Relief Act”) into law. While the principal intention of the Relief Act was to avert the key elements of the “fiscal cliff” by staving off widespread tax increases and sizeable spending cuts, the Relief Act contains a significant change regarding Roth conversions within Section 401(k) and certain other retirement plans and other provisions that affect employee benefits, including education and adoption assistance, dependent care assistance, transit commuting and parking benefits and the employer tax credit for child care assistance. The Relief Act also revived a popular charitable distribution alternative for individual retirement accounts. Lastly, the Relief Act raised tax rates for certain highly compensated individuals and couples. Each of these provisions is described in greater detail below.

Expanded Roth Conversions for Retirement Plans

Section 402A of the Internal Revenue Code of 1986, as amended (the “Code”), provides that participants in Section 401(k), 403(b) or 457(b) plans may make “Roth” contributions to the plan. Participants are taxed on such contributions, but if those contributions satisfy certain requirements, including restrictions on the timing of distributions, both the contributions and earnings are distributed tax-free.

Section 402A also permits participants to convert non-Roth accounts to Roth accounts, which subjects the taxable amount converted to income tax at the time of conversion.  Prior to the Relief Act, only amounts that were otherwise distributable from the pre-tax account (for example, if the participant was age 59 ½ or older) could be converted to Roth accounts. Participants under 59 ½ were ineligible to make an “in-plan” conversion due to the fact that their accounts were not yet “distributable.”

The Relief Act amends Section 402A to allow any participant to make an “in-plan” Roth conversion, regardless of whether the amount is otherwise distributable. This suggests that all amounts can be converted to a Roth account, including deferrals, matching contributions and nonelective employer matching contributions. The provision is effective for conversions occurring after December 31, 2012.

The Congressional intent in expanding Section 402A was to create a revenue offset, as individuals who make “in-plan” Roth conversions will pay income tax on the amount converted when they choose to convert such amounts. Whether this will actually result in additional revenue in the long term is up for debate, however. While the government will certainly increase revenue in the short term as a result of conversions that otherwise would not have occurred, the lost tax revenue on the earnings that would have accumulated over the course of an participant’s career could result in a net loss for the government over the long term.

Insight: In order to allow participants to take advantage of the expanded opportunity to make Roth conversions, plan sponsors must add this discretionary feature to their plans. Plan sponsors desiring to make this feature available must amend their plan by the end of the plan year in which the expanded “in-plan” conversions will first be effective. For example, if the plan offers in-plan conversions in 2013, the plan must be amended by December 31, 2013.

Education Assistance Programs

Section 127 of the Code allows employees to exclude up to $5,250 from their gross income in conjunction with employer-provided educational assistance programs.

Certain provisions of Section 127 (including the exclusion limit of $5,250 and a provision that allows the exclusion to apply to graduate school education assistance) were set to expire at the end of 2012, but the Relief Act extends those provisions permanently.

Adoption Assistance Programs

Section 137 of the Code provides for an exclusion from gross income of up to $12,970 per year for employer-provided adoption assistance.

The adoption assistance exclusion was set to expire at the end of 2012, but the Relief Act extends the exclusion permanently.

Dependent Care Assistance Programs

Section 129 of the Code allows employees to exclude up to $5,000 from their gross income for amounts received in conjunction with employer-provided dependent care assistance programs. This exclusion phases out depending on the lower level of income of either the employee or his/her spouse. If the spouse is a student or incapable of caring for himself or herself, the spouse is “deemed” to have income of $250 per month (or $500 per month if the couple has two or more qualifying dependents).

The “deemed income” provision was set to expire at the end of 2012, but the Relief Act extends this provision permanently.

Transit Commuting and Parking Benefits

Section 132(f) of the Code allows employees to make pre-tax contributions (or employers to provide the same amount as a tax-free subsidy) for employer-provided commuting vehicles or transit passes  (“transit commuting benefits”) or work-related parking expenses. From 2010 through 2011, the limit on the two benefits (transit and parking) was the same.  However, in 2012 the limits shifted to $125 per month for transit commuting benefits and $240 per month for work-related parking expenses.

The Relief Act re-establishes parity between the two transportation benefits for 2012 (retroactively) and 2013.   The IRS recently issued guidance as to how employers may correct the over-withholding of FICA tax on transit benefits. Employers must repay or reimburse their employees the “overcollected” FICA tax on the excess transit benefits for all four quarters of 2012.   Employers who act before the deadline for filing Form 941 for the fourth quarter of 2012 may follow a special procedure to obtain a refund of the employer’s share of the FICA overpayment or, if not, file a Form 941-X for each 2012 quarter to make an adjustment on FICA taxes paid or to request a refund.

The 2013 limit for both transit commuting benefits and work-related parking benefits is $245 per month. This tax-free benefit will expire on December 31, 2013.

Employer Expenses for Child Care Assistance

The Relief Act extends the child care assistance credit of $150,000 per year for qualified childcare facilities permanently.

Distributions from Individual Retirement Accounts for Charitable Purposes

Section 408(d)(8) of the Code permitted taxpayers 70 ½ and older to make tax-free distributions from individual retirement accounts (IRAs) for charitable purposes through 2011.

The Relief Act reinstates this charitable distribution alternative through 2013. The Relief Act provides a transition period to make up for missed opportunities in 2012 by allowing individuals to make qualified charitable distributions from IRAs during January 2013 that will be treated as made on December 31, 2012 (counting as a 2012 tax-free distribution). The Relief Act also allows qualified IRA owners who received an IRA distribution during December 2012 to contribute the amount to a charity, and have the contribution treated as a tax-free distribution. This charitable distribution option will expire again on December 31, 2013.

Tax Rate Increases May Increase Need for Deferred Compensation

The top income tax rate will increase from 35% to 39.6% for single filers with taxable incomes above $400,000 and joint filers with taxable incomes above $450,000.  We expect this tax rate increase will result in employees within the top income tax bracket seeking options by which to defer compensation, with the hope that the top tax rate will eventually decline. Employers may want to consider expanding their deferred compensation alternatives for this top-paid group of employees.

King & Spalding is happy to assist you make amendments to allow expanded Roth conversions, to establish or modify deferred compensation arrangements, or to answer any questions you may have regarding the Relief Act.

Authors, Eleanor Banister, Atlanta, +1 404 572 2755, 4930, ebanister@kslaw.comand Ryan Gorman, Atlanta, +1 404 572 4609, rgorman@kslaw.com.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© King & Spalding | Attorney Advertising

Written by:

King & Spalding
Contact
more
less

King & Spalding on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Privacy Policy (Updated: October 8, 2015):
hide

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.

Security

JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at info@jdsupra.com. In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at: info@jdsupra.com.

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.