As we barrel toward the end of the year we are facing several issues that may impact an employee’s paycheck. Two of these changes are “fiscal cliff” related and the third is a result of the healthcare legislative time table. Regardless of the reason here are three pay changes employers must communicate.
Smaller tax deductions
Of the three changes the one that will have the greatest impact is the limitation on Flexible Spending Accounts. Up to this time there was no limit on the amount of money that could be set aside in an FSA, although limitations on what could be purchased with that money went into effect last year. Starting January 1, 2013 the MAXIMUM amount that can be set aside is $2,500. Given that the average set aside has historically be less than that it may not have a major impact, but for some employees it will. For some organizations it will have a major effect. MIT for example had allowed up to $8000.
Education tax credit
I had a client ask me about this the other day. Up to this point a company has been allowed to provide educational benefits up to $5,250 on a tax-free basis without many restrictions. That will be one of the casualties of the fiscal cliff. In 2013, employers can still provide some type of tax-free educational reimbursements in a more limited manner if the educational reimbursements qualify as a business expense. They must meet certain requirements, such as enhancing the employee’s performance but not qualifying the employee for a new position or career. So the broad ability of reimbursing for any education has ended. You will need to revise your policy explaining what can qualify for reimbursement.
Adoption tax credit
This is another casualty of the fiscal cliff. Qualified adoption plans that allowed employers to reimburse on a tax-free basis up to $12,650 expire on December 31, 2012. Although this will not impact many it may have a major impact on employees who are in the adoption process. If you have anyone that is so affected you may want to notify them.
As I have said time and time again, it is important to communicate to your employees. We are all going to suffer some pain in the pocketbook, but this type of pain is much easier to bear if you have some forewarning.