AASCIF - april-may-june03 Employee benefits plan

Amid all the “E” acronyms, a new one appeared in 2001. The Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA), effective Dec. 31, 2002, made numerous changes to rules for pensions and benefits plans.

Busy human resource and benefits professionals must continually stay abreast of the changing law and how it affects their employer-sponsored benefit plans.

All of the EGTRRA’s changes might be temporary since the law includes a sunset provision that returns everything to pre-EGTRRA status beginning in 2011.

Along with EGTRRA, President Bush signed into law the Job Creation and Worker Assistance Act of 2002 (JCWAA). This job-stimulus bill makes technical corrections to EGTRRA and provides temporary funding relief for defined-benefit plans and other benefit plans, which are effective for years beginning after Dec. 31, 2001.

The 2002 Tax Act amendments to EGTRRA also will be subject to the sunset provision and will expire for years beginning after Dec. 31, 2011. At that time, pre-JCWAA and EGTRRA laws will be reinstated unless new legislation is passed.

While there are many resources describing the changes for defined-benefit plans, the focus of this discussion is the miscellaneous provisions of EGTRAA. How do EGTRRA and JCWAA affect Cafeteria Plans? One change is the extension of Archer Medical Savings Accounts program, which was scheduled to expire on Dec. 31, 2002. This program has been extended one more year, until Dec. 31, 2003.

Another change in Cafeteria Plans is the Adoption Credit and Adoption Assistance tax credits. These were expanded by EGTRRA from a maximum of $5,000 to a maximum of $10,000 effective for tax years beginning after 2001 ($6,000 for a special needs child). In the case of the adoption of a child with special needs, for tax years beginning after 2002, the taxpayer will be allowed to take a $10,000 credit regardless of the amount of the qualified adoption expenses.

Additionally, EGTRRA made corresponding changes to the limits on employer-provided adoption assistance—$10,000 less any previous qualified adoption expenses. The 2002 Tax Act clarifies the amount of expenses paid or incurred during taxable years beginning before 2002 that are taken into account for determining a credit allowable in 2002.

EGTRRA affects the Health Insurance Portability and Accountability Act (HIPPA) for group health plans and Flexible Spending Accounts. Dependent Care Credit allows an increase in deemed earned income for spouses under EGTRRA. Beginning in 2003 a taxpayer may take into account $3,000—increased from $2,400—for employment-related dependent care expenses for one qualifying individual and $6,000—formerly $4,800—for two qualifying individuals. The amount of the tax credit is limited to the participant and the participant’s spouse. Special rules may apply for a spouse who is a student.

Educational assistance programs. EGTRRA made the IRC Section 127 exclusion from income for employer-provided educational assistance benefits permanent from an employee’s gross income. Undergraduate and graduate level course expenses may be reimbursed under the education assistance program.

Qualified state tuition programs. EGTRRA made several favorable changes to the operation of qualified state tuition programs under Section 529. Most importantly, distributions from these plans used for qualified education benefits no longer will be subject to federal income tax effective Jan. 1, 2002. Private colleges and institutions may set up their own tuition credit programs starting in 2002 with distributions allowed in 2004.

Under Section 529, the program expansion of EGTRRA allows distributions from one qualified program to be rolled over to another program on behalf of the same beneficiary, as well as on behalf of a family member, including a cousin, without triggering a taxable distribution. These distributions may be made only once in a 12-month period.

Education IRAs. EGTRRA made setting up education IRAs more advantageous and practical for many taxpayers. The limit for annual after-tax contributions was increased from $500 to $2,000 beginning in 2002. The definition of qualified education expenses was expanded to include qualified elementary and secondary school expenses for both public and private schools, including tuition, living expenses, and the purchase of computer equipment and Internet access.

Employers may wish to consider facilitating payroll deduction arrangements for employees with education IRAs. Payroll deduction arrangements provide a valuable benefit to employees with minimal cost and effort on the part of the employer. Properly communicated, it is also a good way to educate employees on the benefits of tax-favored savings.

Employee benefit plans How they are impacted by the Economic Growth and Tax Relief Reconciliation Act

Employee benefit plans
How they are impacted by the Economic Growth and
Tax Relief Reconciliation Act