2012 Taxpayer Relief Act Includes Retirement and Health & Welfare Provisions

Indianapolis – The American Taxpayer Relief Act of 2012 (also referred to as “fiscal cliff” legislation), recently signed into legislation by President Obama, contained some pertinent retirement and health & welfare provisions, in addition to other changes made by the Act.

In-Plan Roth Transfers

One of the changes made by the Act is the expansion of in-plan Roth conversion opportunities. The legislation eases the rules governing when participants may convert the vested portion of any non-Roth account within 401(k), 403(b) and 457(b) governmental plans into Roth accounts. Prior to the Act, such accounts could only be rolled over upon a distributable event such as termination of employment, death, disability or reaching age 59½. With the passage of the American Taxpayer Relief Act of 2012, participants can now make an in-plan Roth transfer, regardless of if such distributable event has occurred. The difference between a rollover and a transfer is a subtle one and guidance is needed from the IRS before all of the subtleties will be known.

Retirement plans wanting to allow participants to make the in-plan Roth rollover need to specifically permit Roth contributions and in-plan Roth rollovers in the plan. If your plan currently does not permit Roth contributions or in-plan Roth rollovers, an amendment will be needed prior to the end of the plan year in which any in-plan Roth conversions are permitted. However, the amendment would be discretionary, so employers are not required to add either provision. The new rule is only effective for conversions taking place after December 31, 2012.

Adoption Assistance and Dependent Care Benefits

The Act also extended certain provisions effecting health and welfare plans offering dependent care and adoption assistance benefits. The exclusion from an employee’s taxable income of amounts paid by an employer under a qualified adoption assistance program has been made permanent. Under an adoption assistance program, an employer could reimburse an employee on a tax-free basis (for expenses related to the adoption of a child) up to $12,970, for 2013. This benefit was set to expire in 2012 had the Act not been passed.

In addition, an employer could exclude from an employee’s wages on a tax-free basis up to $5,000 in employer-provided dependent care assistance program, as long as the amount was not more than the lesser of the employee’s earned income or that of their spouse. The Act allowed for the deemed earned income of an employee’s spouse who is either a full-time student or incapable of self-care to remain a current levels ($250 per month for 1 qualifying person and $500 per month for 2 or more qualifying persons), instead of falling to lower levels as was set to happen in 2013.

Qualified Transportation Benefits

Through 2011, employers could withhold up to $230 dollars a month from an employer’s pay pre-tax for work-related parking and mass transit benefits. In 2012, the mass transit benefit fell to $125 per month while the parking benefit rose to $240 because certain temporary tax provisions were not extended. The American Taxpayer Relief Act of 2012 retroactively increases the mass transit benefit to the same amount as the work-related parking benefit for 2012 and through the end of 2013. Adjustments for inflation increase the amount to $245 per month for 2013.

In Notice 2013-8, the IRS has addressed how to handle the increase for 2012 if the employer provided benefits in excess of the previous limit of $125, but less than $240. The IRS has stated that these “excess benefits” shall be excluded from the employee’s gross income regardless of whether the employer provided the benefits out of its fund or the benefits were provided through salary deferrals. The Notice also provides a special administrative procedure for employers to use in filing Form 941 and in filing Forms W-2 when there are “excess benefits”.


If you have further questions on The American Taxpayer Relief Act of 2012 and how it could affect your retirement or health and welfare plan, or about amending your plan for the in-plan Roth rollover provisions, don’t hesitate to contact your Nyhart consultant.