Happy New Year! Welcome to 2012.
2011 is in the rearview mirror, and the time has come to prepare for changes coming our way over the next twelve months. AmeriFlex wants to help you do just that. The following is an overview of some of the important issues that will impact our industry in 2012, and how they could potentially affect you and your clients/participants.
Payroll Tax Cut Extension
The two-percentage point federal payroll cut for employees made effective in 2011 will remain in effect through at least February 29 of this year. There is a reasonable chance that the cut will be extended through the end of 2012, but that has not happened yet.
Effect: At least through the end of February, employees will continue to enjoy the benefits of lower "FICA" taxes levied on their taxable income, which itself is lowered by participation in salary-reduction plans such as POP plans, health FSA plans and dependent care plans.It should be noted, however, that if Congress and President Obama cannot agree to extend the payroll tax cut through the end of the year, employers may face a number of payroll processing headaches in March, especially those employers who do their payroll in-house.
New W-2 Reporting Requirements
Beginning with the 2012 tax year, many employers will have to include information regarding the value of their employer-sponsored health coverage on Form W-2. The stated purpose of this requirement is to give notice to employees regarding the actual cost of their health coverage. This requirement was a part of the Patient Protection and Affordable Care Act of 2010 (the health care reform law), the potential fate of which will be discussed below.
Some important things our clients and partners may want to know regarding this new requirement:
Remember that - technically speaking, anyway - this is so-called "interim guidance," which means that it is subject to change in the future. But you can certainly rely upon it throughout 2012.
Health FSA $2,500 Limits for 2013
Beginning in 2013, the health care reform law imposes a $2,500 per calendar year limit on health FSAs. Notice that this is not a "plan year" limitation: it is $2,500 per calendar year, which poses a dilemma for health FSAs that do not run on calendar year plan years.
Consider a health FSA plan year that runs from July 1 through June 30 and imposes a $5,000 maximum. How is that maximum affected by the $2,500 limit imposed in 2013? Thus far, the IRS has yet to address this issue. Unless and until it does, we believe one of three possible options would comply with the spirit and intent of the new law.
Option One: The most conservative option (and the smoothest from a plan administration perspective) would be to simply impose the $2,500 limit before 2013. In the above example, for instance, the employer would simply reduce the $5,000 limit to $2,500 beginning July 1, 2012.
Option Two: Another cautious option would be to declare a so-called "short plan year" for the balance of 2012 and start things fresh on January 1, 2013 with a calendar year plan year. In the above example, for instance, participants could elect up to $5,000 for the July 1- December 31 short plan year. Of course, this option may not be acceptable to plan sponsors who do not want to administer calendar year plan years.
Option Three: This option is somewhat more aggressive than the above two, but may be something some plan sponsors want to consider: Employees would "front-load" some of their salary reductions in 2012 for use during the 2013 part of the plan year.
So, again using the above example, the employer would maintain the health FSA's $5,000 limit on salary reduction contributions but still ensure that no more than $2,500 in salary reductions occur in 2013 (in the case of a $5,000 election, for instance, by simply requiring $3,750 in salary reductions in 2012 and then only $1,250 for the balance of the 2013 half of the plan year).
The rationale for this approach rests on a literal reading of the law, which limits only the salary reductions for health FSAs rather than the benefit as a whole. Whether it complies with the "spirit" of the law is another question. Furthermore, health FSA salary reductions are generally understood to be "pro rata" affairs, with an equal amount reduced per paycheck during the plan year. This "front-loaded" approach would be unorthodox to say the least.
Since the IRS has thus far been largely silent on this issue, AmeriFlex can only offer the above possible "solutions" to its clients and partners for now. Based upon the IRS handling of the health care reform law's implementation during its early stages, however, we feel reasonably confident that the agency will be comfortable with any of the above approaches so long as it is made in good faith and is consistent with the notion of limiting salary reductions to $2,500 in 2013.
The Supreme Court and the 2012 Elections
Believe it or not, 2012 is actually a pretty light year in terms of the time-release capsule that is the health care reform law. The next wave of health care reform law implementation will come next year as preparations are made for the state health care "exchanges" and related provisions coming in 2014.
Nevertheless, some very important things will play out across the judicial and political landscapes over the course of this year. In March, the United States Supreme Court will hear arguments for and against the new law, with special emphasis on the constitutionality of the so-called "individual mandate."
The court will likely render its decision in June, just in time for the run-up to the national political conventions to be held in late summer and the presidential (and congressional) campaigns that will follow. Naturally, whatever the court decides will have a bearing on those races. Because the future of the health care reform law requires as much political analysis as it does legal analysis, look for a lot of both from AmeriFlex over the course of the next 12 months.
We look forward to keeping you informed about these issues as they evolve. In the meantime, please do not hesitate to contact us with any questions or concerns. And, once again, here's to a successful 2012!