EY Payroll NewsFlash. Volume 14, Number 167 June 7, Special edition. Senate s newest tax reform list focuses on tax-favored perks

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1 EY Payroll NewsFlash Volume 14, Number 167 June 7, 2013 Special edition Senate s newest tax reform list focuses on tax-favored perks

2 Senate s newest tax reform list focuses on tax-favored perks by Debera J. Salam and Deborah Spyker, Ernst & Young LLP Prior to the Memorial Day recess, the Senate Finance Committee issued its seventh in a series of papers documenting various options as they relate to potential reforms in the tax code. This latest paper covers areas administration and employee fringe endorsement of any particular idea, it sheds light on the provisions under review and where future tax policy may be headed. In particular, several of the items included in this most recent list of options are connected to the retirement, health, and executive tax expenditures can be reduced or redistributed. For example, the exclusion for achievement awards would be reduced or eliminated while new exclusions would be created for employer-provided student loan and options are weighted to reducing compensation exclusions; however, the report emphasizes that it does not suggest how any increase in tax revenues would be used (e.g., lower uali ed retirement plans Currently, employees can defer paying income tax on up to $17,500 (plus an additional $5,500 of catchup contributions for those they set aside on a pre-tax plan. Lower elective deferrals retirement plans. These annual contribution limits increase as they are indexed federal income is not owed on employee or employer Reducing retirement exclusions Cap at % of taxpayer income contributions until distributions are made from these plans. There is currently no lifetime limit on the amount that individuals can defer under these plans. Lower the pre-tax contribution limit from $17,500 to $14,850 Change the pre-tax contribution limit to a percentage of the taxpayer s income Cap income tax exclusions at $0.28 for each $1 contributed Establish a lifetime contribution limit of $3 million Lifetime limit Pretax limits Lower annual limit Lower annual index of contribution limit Eliminate exclusion for catch-up contributions for those age 50 years or older Following are highlights of some of the options that would change the current tax mechanics of employee fringe click here. 2 EY Payroll NewsFlash June 7, 2013

3 ealt bene t plans The exclusion from income of employer-sponsored health insurance is the single largest tax expenditure in the tax code. Under current law, the value of employer-provided health insurance is generally excluded from taxable income. Also excluded from taxable income are employee pretax of allowance medical expenses. For 2013, the annual pretax contribution in an FSA at the end of the year is forfeited by the individual. For 2013, the to $3,250 for an individual and $6,450 for a family. HSAs can only be established in connection with a high-deductible health plan. Reducing health plan exclusions No new contributions to HSA or FSA accounts Repeal income exclusion Employer health plans Exclusion limited to average cost a cap that decreases over time until all employer contributions are subject to tax Phase out income exclusion Disallow new contributions to an HSA or FSA accounts Limit the exclusion for employer-provided health insurance to the average cost of a deduction equal to the exclusion for employer-provided insurance for workers without employer-provided plans Expand HSAs Repeal the $2,500 annual pretax limit Allow the self-employed to deduct health insurance premiums for purposes of selfemployment tax have no employer health coverage Exclude from an employee s income the fees paid by an employer to an athletic or EY Payroll NewsFlash June 7,

4 Senate s newest tax reform list focuses on tax-favored perks Continued Non uali ed deferred compensation Deferred compensation is compensation that an employee earns in one period but will not receive until deferred compensation is retirement plan rules deferred compensation describes plans that defer the payment of earnings to a future period outside of a Reducing non uali ed plan exclusions Set limit to $1 million Income tax at time of deferral Non uali ed deferred compensation Modify or repeal IRC 409A Repeal 20% penalty tax Under the special timing rule, long as there is a risk of forfeiture and income tax does not apply until the compensation deduction is deferred until the employee recognizes income. plans that do not comply with various rules regarding the timing of deferrals and distributions under IRC 409A. The penalty for non-compliance with the 409A requirements is that all amounts deferred under the plan to date are immediately taxed and subject to a 20% penalty tax, with interest. Modify or repeal IRC 409A Repeal IRC 409A for employees of private companies Repeal the 20% penalty tax subject to Social Security and Medicare tax in a single year 4 EY Payroll NewsFlash June 7, 2013

5 Equity based compensation The taxation of equity-based compensation varies depending on the type of equity, such as stock options or restricted stock, and the conditions associated with its transfer to the employee. Two types of stock plans are Employees are taxed on non-statutory stock options when the options are exercised. Income tax is based on the fair market value of the stock less the exercise price, and the business claims a compensation deduction of a corresponding amount at the same time. In contrast, income tax is owed on incentive stock options when the employee sells the underlying shares after exercising the options. The employee is generally taxed at ordinary rates if the employee did not meet certain holding period requirements and at capital gain rates if the holding period requirements were met. The employer generally only can deduct the value of incentive stock options if the holding period requirements are not stock options in many cases. Reducing executive comp exclusions Apply 162(M) limit to include stock compensation Set 162(M) cap to four times salary of lowest paid Executive compensation Expand 162(M) limit to larger executive group Repeal incentive stock provisions Other types of equity-based compensation, such as restricted stock, are generally taxable when the employee s ownership of the equity has vested, and the corporation can take a corresponding deduction at the same time. The employee s income tax obligation (and the the stock at the time of vesting less the amount, if any, the employee paid for the stock Some options listed to revise the tax rules governing equity-based compensation Repeal incentive stock options Limit the deduction for an employer to the value of the stock option as recorded on the employer s books at the time such options are granted Require the employer to deduct the stock option in the year when it expenses the compensation on its books Repeal deduction for dividends paid by C corporations to employee stock ownership plans EY Payroll NewsFlash June 7,

6 Senate s newest tax reform list focuses on tax-favored perks Continued Life insurance and annuities Under current law, earnings that accrue on cash values of life insurance policies and annuity contracts are not subject to income tax until paid from a life insurance contract are excluded from if there has been no prior distribution of the accrued earnings, those earnings are never subject to income tax. The value of group-term life $50,000 per year and that meets the requirements of Redirecting fringe bene t exclusions Increase taxable value of personal jet use Expand educational assistance bene ts Other fringe bene ts Repeal or reduce achievement awards IRC 79 is excluded from income tax. If the owner of a life insurance contract cashes out the contract prior to the insured s death, current IRS rulings require that the gain on the contract be increased by the value of the insurance coverage to date, although that value Currently tax the annual increase in the inside build-up on life insurance contracts Currently tax the annual increase in the inside build-up on annuity Repeal or reduce parking bene ts Increase the $50,000 limit for employer-provided group-term life insurance 6 EY Payroll NewsFlash June 7, 2013

7 Other employee fringe bene ts The tax code provides for numerous total or partial exclusions exclusions are designed to promote various policies (such as Impose a 50% tax on employers for the net cost of meals, entertainment, gyms, and dining facilities provided to employees and customers, unless the cost is included in the Repeal or reduce the exclusion for employer reimbursement of parking expenses to, for example, $100 (for 2013, the Repeal exclusion for certain employee achievement awards (currently the maximum tax-free amount is set at $1,600 Increase the amount of taxable income that an employee or executive must report for the personal use of a corporate jet Some options listed to expand exclusions for certain employee Allow employees to exclude up to, for example, $5,000 in payments by employer under a student loan repayment assistance program Allow employees to exclude up to, for example, $600 in service volunteers, based upon the volunteer s length of service, to be treated as deferred compensation Business deduction for executive compensation The term executive compensation is generally used to describe compensation provided to senior management. Executive compensation include salaries, short-term incentive pay (such compensation is included in taxable income depends on the type of compensation provided. The reasonable cost of executive compensation is deductible compensation deduction to $1 million for the top four executives of public companies, with an exception for certain performancebased compensation, which includes stock options. (Special, more restrictive rules apply to companies that have received government bailout funds and certain health insurance Some options listed to revise the business deduction for compensation to a larger group of executives including stock options Cap deduction for total executive compensation at multiple is lower Equalize exclusion for employer-paid parking and EY Payroll NewsFlash June 7,

8 Ernst & Young LLP employment tax advisory contacts Mary Angelbeck Julie Gilroy Matthew Ort Ernst & Young Assurance Tax Transactions Advisory Anthony Arcidiacono Peter Berard Gregory Carver Bryan De la Bruyere Jennie DeVincenzo David Germain Mary Gorman Ken Hausser Nicki King Kristie Lowery Thomas Meyerer Chris Peters Stephanie P ster Debera Salam debera.salam@ey.com Debbie Spyker deborah.spyker@ey.com Mike S. Willett mike.willett@ey.com About Ernst & Young Ernst & Young is a global leader in assurance, tax, transaction and advisory are united by our shared values and an make a difference by helping our people, our clients and our wider communities achieve their potential. Ernst & Young refers to the global organization of member firms of of which is a separate legal entity. company limited by guarantee, does not provide services to clients. For more information about our organization, please visit Ernst & Young LLP is a client-serving Limited operating in the US. To our readers: Ernst & Young LLP s Payroll Perspectives and its supplementary Payroll NewsFlash combine to share with you the insights and experience of our Employment Tax Advisory and Unemployment Claims Management professionals. For more than 15 years, Payroll Perspectives has assisted businesses in keeping informed with in-depth and timely analysis of trends and compliance issues in the industry. feedback and look forward to the opportunity to discuss with you the broad range of employment tax services we provide. For more information, please write to Debera Salam at debera.salam@ey.com. For our latest free white papers, click here. Follow us on LinkedIn and Twitter using the links below. Can you expect a personal approach to unemployment claims management? Yes you can! Find out more about the difference our experienced employment and payroll tax professionals bring to the unemployment insurance management process. Click here to request a free evaluation. Connect with us Visit us on LinkedIn Follow us on Twitter 2013 Ernst & Young LLP. All Rights Reserved. SCORE no. YY2937 This publication contains information in summary form and is therefore intended for general guidance only. It is not intended to be a substitute for detailed research Ernst & Young LLP nor any other member of the global Ernst & Young organization can accept any responsibility for loss occasioned to any person acting or refraining from action as a result of any material in this publication. On any specific matter, reference should be made to the appropriate advisor.