American Payroll Association (APA) Basic Guide to Payroll, 2013 Edition
It's more important than ever to be in compliance with payroll laws and regulations! How do you stay in compliance and avoid penalties? The APA Basic Guide to Payroll is written to make understanding the laws and regulations as easy as possible. And this single-volume guide is filled with tools to help you apply the law and make proper calculations – with ease!
The U.S. Supreme Court has upheld the Patient Protection and Affordable Health Care Act (P.L. 111-148). The constitutionality of the law was challenged primarily because of the mandate requiring individuals to buy health insurance. Those who do not comply with the mandate will have to pay a “penalty.” According to the court, the “penalty” is a tax and therefore constitutional under the power to tax granted to Congress. The payroll-related provisions remain unaffected and are summarized below:
Form W-2 reporting
Employers are required to disclose the aggregate cost of employer-sponsored health insurance coverage provided to their employees on the employee's Form W-2. Contributions to any Archer medical savings account (MSA) or health savings account (HSA) of the employee or the employee's spouse or salary reduction contributions to a health flexible spending arrangement (FSA) under a cafeteria plan will not be included.
HSA, MSA tax
The additional tax on distributions made from HSAs not used for qualified medical expenses is increased from 10% to 20% of the amount includible in gross income. Similarly, the additional tax on distributions made from Archer MSAs not used for qualified medical expenses is increased from 15% to 20% of the amount includible in gross income. The increase in the tax imposed on nonqualified distributions from HSAs and Archer MSAs will not impact state income taxation, and is effective to distributions made after December 31, 2010.
HSAs, HRAs, FSAs
The definition of qualified medical expenses, for purposes of reimbursements from health FSAs or health reimbursement arrangements (HRAs), and distributions from HSAs or Archer MSAs, has been modified to include amounts paid for medicine or a drug only if such medicine or drug is a prescribed drug (determined without regard to whether such drug is available without a prescription) or is insulin. Therefore, reimbursements for over-the-counter medicines through a health FSA, HRA, or other employer-provided accident or health plan under Code Sec. 105 may not be excluded from the employee's gross income. Also, distributions from a HSA or Archer MSA to pay for over-the-counter medicines may not be excluded from the employee's gross income and will be subject to the additional penalty. This modification conforms to the definition of qualified medical expenses for purposes of the itemized deductions for medical expenses.
Beginning in 2011, the additional tax on distributions from a HSA or Archer MSA is 20% of the amount includible in income. The exclusion of over-the-counter medicines and drugs from qualified medical expenses for purposes of the rules on HSAs, Archer MSAs, health FSAs, and HRAs will not affect those states, like California and Alabama that do not recognize HSAs. Some states, such as Pennsylvania, that refer to qualified medical expenses under federal law, will be affected by this change unless/until the State updates its Code conformity date. The provision regarding distributions from savings accounts applies to amounts paid with respect to tax years beginning after December 31, 2010. The provision regarding reimbursements for medicine restricted to prescribed drugs and insulin applies to expenses incurred in tax years beginning after December 31, 2010.
Effective for tax years beginning after December 31, 2012, a health FSA will not be a qualified benefit under a cafeteria plan unless the plan provides for a $2,500 maximum annual salary reduction contribution to the FSA. If the plan does not specifically prohibit salary reductions in excess of $2,500, the benefit under the health FSA will not be qualified. Under such circumstances, an employee will be subject to tax on distributions from the health FSA, thereby eliminating any of the tax benefits of health FSA contributions including those under $2,500. The limitation of FSA contributions to $2,500 for tax years after 2012 will not impact states that conform to the federal exclusion by the time the provision takes effect. Because most states start their tax calculations with federal adjustable gross income, there should be no impact on those states. States that do not conform may allow an exclusion from taxation for amounts above the federal limitation as well. Effective for tax years beginning after December 31, 2013, the $2,500 limitation is adjusted annually for inflation. Any inflation adjustment that is not a multiple of $50 is rounded down to the next lowest multiple of $50. The amendments apply to tax years beginning after December 31, 2012.
Simple cafeteria plans
Beginning for tax years after December 31, 2010, certain small employers' cafeteria plans can qualify as simple cafeteria plans, under which the applicable nondiscrimination requirements of a classic cafeteria plan are treated as satisfied. A simple cafeteria plan is a cafeteria plan established and maintained by an eligible employer that meets certain contribution, eligibility and participation requirements.
An applicable nondiscrimination requirement that will be deemed as met by an employer establishing a simple cafeteria plan is any nondiscrimination requirement applicable to a classic cafeteria plan under Code Sec. 125(b), group-term life insurance under Code Sec. 79(d), an accident and health plan under Code Sec. 105(h), or a dependent care assistance program under Code Sec. 129(d)(2), (3), (4) or (8).
Small employers may find it difficult to justify providing a classic cafeteria plan to employees if it requires diminishing benefits enjoyed by owner-employees to satisfy the nondiscrimination requirements of a classic cafeteria plan. Through the establishment of a simple cafeteria plan, employers can retain potentially discriminatory benefits for highly compensated and key employees (subject to some restrictions relating to contributions, discussed below) while allowing other employees to enjoy the benefits of a cafeteria plan without worrying about running afoul of the nondiscrimination requirements of a classic cafeteria plan.
An employer eligible to establish a simple cafeteria plan is any employer that, during either of the two preceding years, employed an average of 100 or fewer employees on business days. For purposes of this rule, a year may only be taken into account if the employer was in existence throughout the year. If an employer was not in existence throughout the preceding year, the employer may nonetheless be considered as an eligible employer if it reasonably expects to average 100 or fewer employees on business days during the current year.
If an employer has 100 or fewer employees for any year and establishes a simple cafeteria plan for that year, then it can be treated as meeting the requirement for any subsequent year even if the employer employs more than 100 employees in the subsequent year. However, this exception does not apply if the employer employs an average of 200 or more employees during the subsequent year.
A simple cafeteria plan must also meet rigid contribution requirements on the part of the employer. The contribution requirements are met if the employer is required by the plan, regardless of whether a qualified employee makes any salary reduction contribution, to make a contribution to provide qualified benefits on behalf of each qualified employee, in an amount equal to: (1) a uniform percentage (not less than 2%) of the employee's compensation for the year, or (2) an amount not less than the lesser of: (a) 6% of the employee's compensation for the plan year or (b) twice the amount of the salary reduction contributions of each qualified employee.
If the employer bases the satisfaction of the contribution requirements on the second option, it will not be treated as met if the rate of contributions with respect to any salary reduction contribution of a highly compensated or key employee is greater than that with respect to any other employee. Beyond this prohibition, the established contribution requirements are not to be treated as prohibiting an employer from making contributions to provide qualified benefits under the plan in addition to the required contributions.
For purposes of the contribution requirements, a salary reduction contribution is any amount contributed to the plan at the election of the employee and not includable in the employee's gross income under the cafeteria plan provisions. The terms "highly compensated employee" and "key employee" retain their definitions under the classic cafeteria plan provisions. A "qualified employee" is any employee who is not a highly compensated or key employee.
Employee eligibility and participation requirements. A simple cafeteria plan must also satisfy minimum eligibility and participation requirements. The requirements are met if all employees who had at least 1,000 hours of service for the preceding plan year are eligible to participate and if each employee eligible to participate may elect any benefit under the plan, subject to terms and conditions applicable to all participants.
An employer may elect to exclude from the plan, regardless of the satisfaction of the 1,000 hour requirement, employees who have not attained the age of 21 before the close of the plan year, who have less than one year of service with the employer as of any day during the plan year, who are covered under a collective bargaining agreement if there is evidence that the benefits covered under the plan were the subject of good faith bargaining between employee representatives and the employer, or are nonresident aliens working outside the U.S. whose income did not come from a U.S. source.
References to employers with regard to simple cafeteria plans include references to predecessors of such employers. This means that, among other considerations, for purposes of determining the qualification of a business that has recently changed ownership, the fact that the previous owner had 100 or fewer employees in a preceding year can be used to determine eligibility of the current ownership to establish a simple cafeteria plan. Also, any person treated as a single employer for purposes of the Work Opportunity Credit under Code Sec. 52(a) or (b) or for purposes of deferred compensation rules under Code Sec. 414(n) or (o) shall be treated as one person for purposes of simple cafeteria plans. The provision applies to years beginning after December 31, 2010.
Exchanges cannot include cafeteria plans
“Qualified benefit” generally does not include certain exchange-participating qualified health plans. Effective for tax years beginning after December 31, 2013, a cafeteria plan cannot offer a qualified health plan offered through an American Health Benefit Exchange. The law requires in each state, the establishment of an American Health Benefit Exchange, which facilitates the purchase of qualified health plans. A qualified benefit, for purposes of cafeteria plans, does not include these health plans. A “qualified health plan” is one that: (1) has in effect a certification that such plan meets the criteria for certification under the law issued or recognized by each exchange through which such plan is offered; (2) provides the essential health benefits package required under the law, and; (3) is offered by a health insurance issuer that (a) is licensed and in good standing to offer health insurance coverage in each state in which the issuer offers health insurance coverage, (b) agrees to offer at least one qualified health plan in the silver level and at least one plan in the gold level in each exchange, (c) agrees to charge the same premium rate for each qualified health plan of the issuer without regard to whether the plan is offered directly from the issuer or through an agent and (d) complies with any new regulations and any other applicable exchange regulations. A “qualified health plan” also includes one offered through the Consumer Operated and Oriented Plan (CO-OP) program or a community health insurance option).
Small group market exception. There is an exception to this prohibition in the case of Exchange-eligible employers offering employees the opportunity to enroll in a qualified health plan through an Exchange. An Exchange-eligible employer is, in tax years beginning after December 31, 2013, a small employer electing to make all of its full-time employees eligible for one or more qualified health plans offered in the small group market through an Exchange. A small employer is an employer who employed an average of at least one, but not more than 100, employees on business days during the preceding calendar year and employs at least one employee on the first day of the plan year.
small group market is the health insurance market under which employees obtain health insurance coverage through a group health plan maintained by a small employer. This exception allows Exchange-eligible employers in the small group market to offer qualified health plans through an exchange as a part of a cafeteria plan in tax years beginning after December 31, 2013.
Beginning in 2017, a state may allow issuers of health insurance coverage in large group markets to offer health insurance under the Exchange, thereby making it possible for all employers to be Exchange-eligible employers. A large employer is any employer who employed more than an average 100 employees in the preceding calendar year. This expanded exception allows all Exchange-eligible employers to offer qualified health plans as a part of cafeteria plans beginning in 2017, but only if the state allows large employers to participate in the Exchange. The provision applies to tax years beginning after December 31, 2013.
Additional medicare tax
In addition to the 1.45% employee portion of the (medicare tax imposed on wages, a 0.9% medicare tax is imposed on every taxpayer (other than a corporation, estate or trust) who receives wages with respect to employment during any tax year beginning after December 31, 2012, in excess of $200,000 ($250,000 in the case of a joint return, $125,000 in the case of a married taxpayer filing separately).
For this purpose, the term "employment" is as defined under Code Sec. 3121(b) and generally includes any service, of whatever nature, performed by an employee for the person employing him, irrespective of the citizenship or residence of either. The additional medicare tax means that the portion of wages received in connection with employment in excess of $200,000 ($250,000 for joint filers, $125,000 in the case of married taxpayer filing separately) will, after the effective date, be subject to a 2.35% employee portion of the medicare tax, or a total medicare rate (employer and employee portions) of 3.8%.
Unlike the general 1.45% medicare tax on wages, the additional 0.9% tax is on the combined wages of the employee and the employee's spouse, in the case of a joint return.
The obligation to withhold the additional medicare tax is only imposed on an employer if the employee receives wages from the employer in excess of $200,000. The employer is permitted to disregard the amount of wages received by the taxpayer's spouse.
If the additional medicare tax is not withheld by the employer, the employee is responsible for paying such tax. However, if an employer required to deduct and withhold the additional medicare tax fails to do so, and the employee pays the additional tax, the employer will not be obligated for the additional medicare tax but remains subject to penalties and additions to tax for failing to withhold.
The employee is personally liable for the additional 0.9% medicare tax to the extent it is not withheld by the employer. This contrasts with the employee portion of the general medicare tax of 1.45% of wages for which the employee generally has no direct liability.
The provision applies with respect to remuneration received, and tax years beginning, after December 31, 2012.
Excise tax on high cost employer-sponsored health coverage
A 40% excise tax will be imposed on health coverage providers starting in 2018 to the extent that the aggregate value of employer-sponsored health coverage for an employee exceeds a threshold amount. This is the tax on so-called “Cadillac” health plans.
Employees who are exempt from the individual mandate to buy health insurance but who do not qualify for premium subsidies are eligible for a employer-provided vouchers equal to the amount the employer would have spent on individual or family coverage. For vouchers provided after Dec. 31, 2013, gross income of the employee does not include the amount of the voucher, up to the amount actually paid for a qualified plan. In addition, effective for vouchers provided after Dec. 31, 2013, employers can deduct, as compensation for personal services actually rendered, the full amount of the free choice voucher provided.
Notice required. Employers are required to provide a notice pursuant to the Fair Labor Standards Act (FLSA) that, if an employee purchases a qualified health plan, and the employer does not offer a free choice voucher, the employee may lose the employer contribution to any health benefits plan offered by the employer. A 40% excise tax will be imposed on health coverage providers starting in 2018 to the extent that the aggregate value of employer-sponsored health coverage for an employee exceeds a threshold amount. This is the tax on so-called “Cadillac” health plans.
Beginning after December 31, 2013, for purposes of employers required to report on their health insurance coverage, offering employers are defined as any employers offering coverage if the required contribution of any employee exceeds 8% of the employee's wages. For calendar years after 2014, the Department of Health and Human Services will adjust the 8% amount to reflect the rate of premium growth after 2013. Terms in the free choice voucher provision have the same meaning as in the provision for shared responsibility for employers.
Conforming amendments. After December 31, 2013, for purposes of employers required to report on their health insurance coverage, employers include offering employers. In addition, required annual reports regarding offering employers must include the option for which the employer pays the largest portion of the cost of the plan and the portion of the cost paid by the employer in each of the enrollment categories under such option.
Additional required reports. Beginning in 2014, applicable employers will be required to report to the Secretary of the Treasury whether they offer full time employees and their dependents the opportunity to enroll in minimum essential coverage under an eligible employer sponsored plan and provide details regarding the coverage offered. Applicable employers must also report the number of full-time employees for each month during the year, and their names, addresses and taxpayer identification numbers. A person required to file a return under the new provision is also required to furnish a written statement to the individual with respect to whom information is reported, detailing the contents of the informational return.(National Federation of Independent Business et al. v. Sebelius, No 11-393, June 28, 2012.)
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