United States: Tax Legislation Affects Employee Benefits, Social Security Taxes and Individual Retirement Accounts

The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (the Act), which President Obama signed into law on December 17, 2010, has several provisions relating to employee benefits, Social Security taxes and individual retirement accounts (IRAs).

Educational Assistance Programs

Section 127 of the Internal Revenue Code of 1986 (the Code) permits an employee to exclude from income up to $5,250 annually for educational assistance benefits (such as tuition, fees, books and supplies) incurred by the employer on behalf of the employee. This assistance must be furnished pursuant to a written plan adopted by the employer and may not discriminate in favor of highly compensated employees.

Section 127 was to expire on December 31, 2010, but the Act extends the expiration date by two years, until December 31, 2012.

Transit "Parity"

Section 132(f) of the Code allows an employee to exclude "qualified transportation fringe" benefits furnished by the employer from gross income. Such benefits include commuter highway transportation, transit passes, qualified parking and qualified bicycle commuting reimbursement. These benefits can be provided through salary reduction, thus allowing employees to purchase them using pre-tax dollars.

In the past, there have been different annual dollar limits on these benefits. In 2010, the maximum qualified parking benefit has been $230 per month. Under last year's economic stimulus legislation, the maximum combined limit for commuter highway transportation and transit passes was increased to the same level as the maximum qualified parking benefit, but only for the year 2010.

The Act extends the "parity" between these benefits for 2011 only. Therefore, the maximum for both benefits will again be $230 for 2011.

Social Security Taxes

The Act reduces the portion of Social Security tax payable by employees from 6.2% to 4.2% for 2011 only. The employer tax remains at 6.2% for 2011. Both taxes apply to 2011 wages up to $106,800, which is the same wage base as in 2010.

Charitable Contributions from IRAs

Section 408(d)(8) of the Code allowed an IRA owner to exclude from gross income up to $100,000 of "qualified charitable distributions" (QCDs) from the IRA. QCDs could only be made to charitable organizations (other than private foundations and donor-advised funds) as to which contributions from a taxpayer would be eligible for the charitable contribution deduction. Also, QCDs could only be made on or after the IRA owner attained age 70½. QCDs were also taken into account for purposes of determining whether the IRA owner received the required minimum distribution for the calendar year.

Section 408(d)(8) expired at the end of 2009. However, the Act has retroactively extended its life to apply to QCDs made in 2010 or 2011. Because the Act was enacted so late in 2010, it allows an IRA owner to elect to have a QCD made in January 2011 to be deemed to have been made on December 31, 2011.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.