December 2012 Tech Flex: Benefits and Payroll

December 2012, Issue XII

Tech Flex

Topics Covered in this Issue: Benefits:

DOL Provides “Sandy” Employee Benefits Compliance Guidance

Wellness Program Guidance Released

HHS Releases Essential Benefits Guidance

Health Insurance Market Reform Guidance Released

2013 Medical Mileage Rate Announced by IRS

Payroll:

IRS Issues Guidance on Additional Medicare Tax

IRS Releases 2013 Automobile Business Use Mileage Rate

Colorado Increase Minimum Wage

Minimum Wage Raised in Vermont

2 Tech Flex: December 2012, Volume XII

DOL PROVIDES “SANDY” EMPLOYEE BENEFITS COMPLIANCE GUIDANCE On November 20, 2012, the United States Department of Labor (DOL) issued compliance guidance regarding the impact of Hurricane Sandy on employee benefits including issues in relation to the Consolidated Omnibus Budget Reconciliation Act (COBRA) and benefits claims (e.g. flexible spending account claims). In this guidance, the DOL stated: “The Department recognizes that plan participants and beneficiaries may encounter an array of problems due to the Hurricane, such as difficulties meeting certain deadlines for filing benefit claims and COBRA elections. The guiding principle for plans must be to act reasonably, prudently, and in the interest of the workers and their families, who rely on their health plans for their physical and economic well-being. Plan fiduciaries should make reasonable accommodations to prevent the loss of benefits in such cases and should take steps to minimize the possibility of individuals losing benefits because of a failure to comply with pre-established timeframes.” To permit our clients to determine whether such flexibility is warranted, ADP Benefit Services will be directing issues regarding COBRA and flexible spending account directly caused by Sandy to the client for decision and direction. Examples of such issues would include but are not limited to untimely COBRA elections or premium payments, late submission of FSA claims or destroyed claims substantiation documentation. For a copy of the DOL guidance, please click on the link provided below. http://www.dol.gov/ebsa/newsroom/2012/EBSA112012.html


WELLNESS PROGRAM GUIDANCE RELEASED On November 20, 2012, the United States Departments of Labor (DOL), Health and Human Services (HHS) and Treasury released proposed regulations in relation to the wellness program provisions of the Affordable Care Act (ACA). The proposed rules appeared in the Federal Register on November 26, 2012, and provided a 60-day comment period. The proposed regulations if enacted would be effective for plan years beginning on or after January 1, 2014. Background Provisions under the Health Insurance Portability and Accountability Act of 1996 (HIPAA) generally prohibit group health plans and group health insurance issuers from discriminating against individual participants and beneficiaries in eligibility, benefits, or premiums based on a health factor. An exception to the general rule allows premium discounts or rebates or modification to otherwise applicable cost sharing (including copayments, deductibles or coinsurance) in return for adherence to certain programs of health promotion and disease prevention. Final regulations were released in December of 2006 (2006 regulations) regarding the HIPAA nondiscrimination and wellness provisions and divided the wellness programs into two general categories. The first category is programs that either do not require an individual to meet a standard related to a health factor in order to obtain a reward or that do not offer a reward at all (“participatory wellness programs”). Participatory wellness programs comply with the nondiscrimination requirements without having to satisfy any additional standards if participation in the program is made available to all similarly situated individuals. Examples include a fitness center reimbursement program, a diagnostic testing program that does not base any reward on test outcomes, a program that waives cost sharing for prenatal or well-baby visits, a program that reimburses employees for the costs of smoking cessation programs regardless of whether the employee quits smoking, and a program that provides rewards for attending a free health education seminar. Under the 2006 regulations, there is no limit on the financial incentives for participatory wellness programs. The second category of wellness programs consists of programs that require individuals to satisfy a standard related to a health factor in order to obtain a reward (“health-contingent wellness programs”). This category requires an individual to attain or maintain a certain health outcome in order to obtain a reward, such as quitting smoking, obtaining certain biometric screening results or meeting specified exercise


requirements. Under such programs, a plan or health insurance issuer may vary benefits, premiums or contributions based on whether the participant has met the specified requirements. However, under the 2006 regulations, a “health-contingent wellness program” must meet the following requirements in order to be considered non-discriminatory. (1) The reward may not exceed 20 percent of the total cost of coverage under the plan. (2) Program is reasonably designed to promote health or prevent disease. (3) Eligible individuals are provided a chance to qualify for the reward at least once per year. (4) The reward is available to all similarly situated individuals, and a reasonable alternative standard will be made available to any individual for whom it is unreasonably difficult or medically inadvisable to satisfy the health-related standard. (5) Disclosure of the availability of a reasonable alternative standard in all plan materials describing the terms of the wellness program. New Proposed Regulations The 2012 proposed wellness program regulations (2012 proposed regulations) largely reflect the 2006 regulations. However, the 2012 proposed regulations if enacted would increase the financial incentives available to plan participants as follows.

Under the 2012 proposed regulations, the current maximum reward of 20 percent of

the total cost of coverage under the plan would be increased to 30 percent.

An additional 20 percent, for a total incentive of 50 percent, would be available but only if offered in connection with a program that is designed to end or reduce the use of tobacco.

Rewards under “participatory wellness programs” do not need to be factored in to

the maximum reward under “health-contingent wellness programs”, even if the participation-only component such as the completion of health risk assessment is teamed with a results-based component (e.g. smoking cessation).


The 2012 proposed regulations confirm (as based on the 2006 regulations) that permitted financial rewards may include a premium rebate, a waiver of deductibles, co-insurance or co-payments.

All wellness programs must be voluntary in order to meet requirements under the

Americans with Disabilities Act.

It is proposed that the wellness program rules apply to grandfathered and non-grandfathered plans (as these terms are defined under ACA) and to insured and self-insured group health plans whether “small” (less than 100 participants) or “large” plans (100 participants or more participants).

In addition, the 2012 proposed regulations provide further guidance (including the

following) on how employers and insurers may comply with the requirement of offering a “reasonable alternative” to employees who cannot attain the results-based goals due to medical reason including the requirement that all plan materials describing the terms of the wellness program must include the availability of a reasonable alternative standard.

The 2012 proposed regulations provide the following standard model language and

permitted variation may be used to satisfy the obligation to notify employees of the alternative reasonable standard.

Standard Model Language: “Your health plan is committed to helping you achieve your best status. Rewards for participating in a wellness program are available to all employees. If you think you might be unable to meet a standard for a reward under this wellness program, you might qualify for an opportunity to earn the same reward by different means. Contact us at [insert contact information] and we will work with you to find a wellness program with the same reward that is right for you in light of your health status.”

Permitted Variation: “Fitness is Easy! Start Walking! Your health plan cares about your health. If you are overweight, our Start Walking program will help you lose weight and feel better. We will help you enroll. (**If your doctor says that walking isn’t right for you, that’s okay too. We will develop a wellness program that is.)”


Although the notice of the reasonable alternative standard must be included in written materials describing the wellness program, it need not be included in materials that simply make reference to the existence of the wellness program. For example, reference to the reasonable alternative standard need not be included in the Summary of Benefits and Coverage (SBC) if the SBC only refers to the wellness program and does not describe details of the program.

Employers are not required to “pre-design” reasonable alternative standards but may instead design them once an employee requests alternative standards.

If completion of an educational program is the reasonable alternative standard

provided, the employer is required to make the program available rather than requiring the employee locate one. In addition, the employer may not require that the employee pay for the program.

The employer need not pay for the cost of food where the reasonable alternative

standard is a diet program but must pay any required employee participation or membership fee.

Only where it is “reasonable under the circumstances” may an employer request

from the employee’s personal physician a written statement stipulating that the standard wellness goal presents unreasonable difficulties to the employee or that it is against medical advice for the employee to attempt to attain it. However, where the difficulty is clearly present, the employer would not have a reasonable basis for requesting the limitation confirmation.

Comments on the proposed regulations must be received by January 25, 2013. Please click on the link provided below to access the HHS wellness program fact sheet: http://www.healthcare.gov/news/factsheets/2012/11/wellness11202012a.html For a copy of the proposed wellness program regulations, please click on the link provided below: http://www.gpo.gov/fdsys/pkg/FR-2012-11-26/pdf/2012-28361.pdf


HHS RELEASES ESSENTIAL BENEFITS GUIDANCE On November 20, 2012, the United States Department of Health and Human Services (HHS) released proposed regulations on essential health benefits (including actuarial value, minimum value, and accreditation standards) provisions of the Affordable Care Act (ACA). The proposed rules appeared in the Federal Register on November 26, 2012, and provided a 30-day comment period. The proposed regulations if enacted would be effective for plan years beginning on or after January 1, 2014. Background Effective as of January 1, 2014, all non-grandfathered health insurance coverage in the individual and small group markets, Medicaid benchmark and benchmark-equivalent plans, and Basic Health Programs (if applicable) will be required to cover essential health benefits (EHB). ACA creates four tiers of health plans available for purchase through the Exchanges. Each tier is defined as shown below by its actuarial value (AV), or percent of services paid for by the plan. The proposed rule on these issues outlines the future health exchange and issuer standards related to coverage of EHB and actuarial value, and proposes a timeline for qualified health plans to be accredited for use in the future Exchanges. It is important to note that the proposed regulations stipulated that “because the PHS Act defines “state” to include the U.S. territories (Puerto Rico, Guam, the Virgin Islands, American Samoa, and the Northern Mariana Islands), the EHB requirements established by section 1302 of the Affordable Care Act apply to the territories.” However, comments are specifically requested on how the benchmarking process should apply in these territories based on the small size and unique nature of these markets. EHB must include items and services in the following 10 statutory benefit categories: Ambulatory patient services

Emergency services

Hospitalization

Maternity and newborn care

Mental health and substance use disorder services, including behavioral health treatment

Prescription drugs


Rehabilitative and habilitative services and devices

Laboratory services

Preventive and wellness services and chronic disease management

Pediatric services, including oral and vision care. In addition, an EHB package must either provide a level of coverage that meets the definition of bronze, silver, gold, or platinum level coverage or a catastrophic plan. The four prescribed coverage levels vary based on the percentage of full AV of benefits the plan is designed to provide, as described below: Bronze: designed to provide benefits actuarially equivalent to 60% of full value; Silver: designed to provide benefits actuarially equivalent to 70% of full value; Gold: designed to provide benefits actuarially equivalent to 80% of full value; and Platinum: designed to provide benefits actuarially equivalent to 90% of full value. According to the HHS “these AVs, called “metal levels,” will assist consumers in comparing and selecting health plans by allowing a potential enrollee to compare the relative payment generosity of available plans. Taken together, EHB and AV will significantly increase consumers’ ability to compare and make an informed choice about health plans.” As noted above, another plan option available to individual insurers in 2014 is a catastrophic plan generally defined as a plan that provides coverage for essential health benefits and provides no benefit for any plan year until the individual has incurred cost-sharing expenses equal to the overall cost-sharing limit for the plan year. The deductible cannot apply to at least three primary care visits. A catastrophic plan is permitted only in the individual market and only for young adults who are under age 30 before the plan year begins and those persons exempt from the individual mandate because affordable coverage is not available or they have a hardship exemption. Essential Health Benefits: The ACA sets out that EHB be equal in scope to benefits offered by a “typical employer plan.” The HHS stipulates following in the EHB Facts Sheet: “To meet this requirement in every state, the proposed rule defines EHB based on a state-specific benchmark plan, including the largest small group health plan in the


state. The rule proposes that states select a benchmark plan from among several options identified in the proposed rule, and that all plans that cover EHB must offer benefits that are substantially equal to the benefits offered by the benchmark plan. “ The benchmark options provided are as follows. (1) The largest plan by enrollment in any of the three largest products in the state’s small group market. (2) Any of the largest three state employee health benefit plans options by enrollment that is generally available to state employees. (3) Any of the largest three national Federal Employees Health Benefits Program (FEHBP) plan options by enrollment that is offered to all health benefits-eligible federal employees. (4) The largest (excluding Medicaid enrollments) insured commercial HMO in the state. If the state should fail to select a benchmark, the default will be the largest plan by enrollment in the largest product in the state’s small group market. If a selected benchmark plan does not include one of the 10 required categories of benefits, the state or HHS will supplement the missing category. Actuarial Value (AV): AV is calculated as the percentage of total average costs for covered benefits that a plan will cover. For example, if a plan has an AV of 70 percent, on average, a consumer would be responsible for 30 percent of the costs of all covered benefits. As noted previously, beginning in 2014, non-grandfathered health plans in the individual and small group markets must meet certain AVs, or metal levels: 60 percent for a bronze plan, 70 percent for a silver plan, 80 percent for a gold plan, and 90 percent for a platinum plan. The proposed HHS regulations provide for a “reasonable de minimis variation” in the AVs used to determine levels of coverage (i.e. bronze, silver, gold, and platinum). Noting that the ACA authorized the establishment of such standard, the proposed rule preamble stated as follows: “…we propose a de minimis variation of +/- 2 percentage points for all non-grandfathered plans. For example, a silver plan could have an AV between 68 and 72 percent. We believe that a de minimis amount of +/- 2 percentage points strikes the right balance between ensuring comparability of plans within each metal level and allowing plans the flexibility to use convenient cost-sharing metrics.”


In addition, the proposed rule provided an “AV calculator” that was developed using a set of claims data weighted to reflect the standard population projected to enroll in the individual and small group markets for the identified year of enrollment. Plans would input information on cost-sharing parameters in determining the AV of an applicable plan and to promote transparency. This calculator is required to be used to determine a plan’s AV. To access the proposed AV calculator, please click on the link provided below. http://cciio.cms.gov/resources/regulations/index.html#pm

Accreditation Standards: The ACA requires that qualified health plans must be accredited in order to be offered under an Exchange. Under the November 20 proposed regulations, the HHS proposes that a Federally-facilitated Exchange, including State Partnership Exchanges, will apply the same accreditation standards as the National Committee for Quality Assurance (NCQA) and Utilization Review Accreditation Commission (URAC) on issuer’s commercial or Medicaid lines of business until the fourth year of certification of a qualified health plan (QHP) (i.e., 2016 certification for the 2017 coverage year). In its proposal, the HHS stated as follows:

“The timeline outlined in the proposed rule ensures that consumers have access to high-quality plans, but also recognizes the significant time that issuers will need to obtain accreditation. QHP issuers that do not have this existing accreditation must schedule the accreditation review in their first year of certification of the QHP (e.g., 2013), and be accredited on their QHP policies and procedures in their second and third years of certification (e.g., 2014 and 2015). By the fourth year of certification of the QHP (e.g., 2016 certification for the 2017 coverage year), QHP issuers must be accredited on the basis of local performance of its QHP.”

Minimum Value: Under the ACA’s shared responsibility provisions, employers can be subject to a penalty if, among other factors, the health plan offered to employees does not provide “minimum value” (i.e. cover at least 60% of the total allowed costs under the plan). The proposed regulations provide that minimum value (MV) can be determined using a calculator provided by the IRS and HHS, a safe harbor established by the IRS and HHS, or through an actuarial certification. The proposed regulations also provide that health savings account (HSA) and health reimbursement arrangement (HRA) contributions will be considered in determining whether a plan provides MV.


Comments on the proposed regulations must be received by December 26, 2012. Please click on the link provided below to access the HHS EHB fact sheet: http://www.healthcare.gov/news/factsheets/2012/11/ehb11202012a.html For a copy of the proposed EHB regulations, please click on the link provided below: http://www.gpo.gov/fdsys/pkg/FR-2012-11-26/pdf/2012-28362.pdf HEALTH INSURANCE MARKET REFORM GUIDANCE RELEASED On November 20, 2012, the United States Department of Health and Human Services (HHS) released proposed regulations in relation to the health insurance market reform provisions of the Affordable Care Act (ACA). The proposed rules appeared in the Federal Register on November 26, 2012, and provided a 30-day comment period. The proposed regulations if enacted would be effective for plan years and policy years beginning on or after January 1, 2014. Background As a result of ACA, health insurance market reforms relating to (1) guaranteed availability of coverage, (2) health insurance premiums, (3) single risk pool, (4) guaranteed renewability of coverage, and (5) catastrophic plans are effective in the individual and small group health plan market for plan years (small group market) and policy years (individual market) starting on or after January 1, 2014. The guidance released on November 20th provided the following proposals. Guaranteed Availability of Coverage: Health insurance issuers generally would be prohibited from denying coverage to people because of a pre-existing condition or any other factor such as health status, medical history, gender, and industry of employment. Under the proposal, individuals would generally need to obtain coverage during open enrollment periods. However, individuals would have new special enrollment opportunities in the individual market when they experience certain losses of other coverage. Per the proposed regulations: “A health insurance issuer in the group market and individual market shall establish special enrollment periods for qualifying events as defined under section 603 of the


Employee Retirement Income Security Act of 1974 (ERISA), as amended. Enrollees shall be provided 30 calendar days after the date of the qualifying event to elect coverage, with such coverage becoming effective consistent with the dates described in §155.420(b) of this subchapter. These special enrollment periods are in addition to any other special enrollment periods that are required under federal and state law.” In accordance with §155.420(b) coverage under the Exchange in relation to special enrollments generally must be effective as follows. For a qualified health plan (QHP) selection received by the Exchange from a qualified individual between the first and the fifteenth day of any month, the Exchange must ensure a coverage effective date of the first day of the following month; and between the sixteenth and the last day of any month, the Exchange must ensure a coverage effective date of the first day of the second following month. However, in the case of birth, adoption or placement for adoption, the Exchange must ensure that coverage is effective on the date of birth, adoption, or placement for adoption, In the case of marriage, must ensure coverage is effective on the first day of the following month following enrollment. The qualifying events under section 603 of ERISA are as follows: (1) The death of the covered employee. (2) The termination (other than by reason of such employee’s gross misconduct), or reduction of hours, of the covered employee’s employment. (3) The divorce or legal separation of the covered employee from the employee’s spouse. (4) The covered employee becoming entitled to benefits under title XVIII of the Social Security Act. (5) A dependent child ceasing to be a dependent child under the generally applicable requirements of the plan.


(6) A proceeding in a case under title 11, commencing on or after July 1, 1986, with respect to the employer from whose employment the covered employee retired at any time. Fair Health Insurance Premiums: It is proposed that health insurance issuers be allowed to vary premium rates for health insurance coverage in the individual and small group markets based on a limited set of specified factors as follows. (1) Whether the plan or coverage applies to an individual or family; (2) rating area; (3) age, limited to a variation of 3:1 for adults; and (4) tobacco use, limited to a variation of 1.5:1. All other rating factors such as health status, claims experience, gender, industry, occupation, and duration of coverage are prohibited. For purposes of family coverage, any premium variation for age and tobacco use must be applied to the portion of premium attributable to each family member. Single Risk Pool: Health insurance issuers would be required to maintain a single statewide risk pool for each of their individual and small employer markets, unless a state chooses to merge the individual and small group pools into one pool. The risk pool would not include grandfathered health plans. The health risk of the entire pool must be the basis for premiums and annual rate changes. The proposed guidance explained the need for the inclusion of this proposal as follows: “Currently, health insurance issuers may maintain several blocks of business, or “pools,” for their individual and small group market business. Most states place some restrictions on the number of small group blocks of business. However, the individual market generally has not been subject to similar restrictions. In the past, some issuers used separate pools to segment risks, resulting in large rate increases for less-healthy enrollees. A single risk pool will tend to lower rates in the individual market by including younger, healthier individuals in the pool and ensuring that newer and more long-term policyholders are pooled together. In the small group market, a single risk pool will stabilize rates.” Guaranteed Renewability of Coverage: The proposed rule reaffirms existing protections that individuals and employers have with respect to coverage renewal. Specifically a health insurance issuer offering health insurance coverage in the individual or group market is required to renew or continue in force the coverage at the option of the plan sponsor or the individual, as applicable. For example, these protections would prohibit issuers from refusing to renew coverage because an individual or employee becomes sick or has a pre-existing condition.


However, the proposed rule provides that an issuer may not renew or discontinue health insurance coverage offered in the group or individual market based on specified factors including but not limited to (1) nonpayment of required premiums on a timely basis, (2) fraud, (3) violation of participation or contribution rules, (4) termination of plan (issuer is ceasing to offer coverage in the market), and (5) all plan enrollees moved outside the services area Catastrophic Plans: Under the proposed rule, young adults and people for whom coverage would otherwise be unaffordable will have access to a catastrophic plan that will have a lower premium, protect against high out-of pocket costs, and cover recommended preventive services without cost sharing. It is proposed that individuals younger than age 30 before the beginning of the plan year are eligible to enroll in catastrophic plans and if a catastrophic plan enrollee reaches age 30 during a plan year, such enrollee may continue in the catastrophic plan for the remainder of the plan year. In addition, a second group of individuals eligible to enroll in catastrophic plan include those who have been certified as exempt from the individual responsibility payment because they cannot afford minimum essential coverage, or they are eligible for a hardship exemption. Comments on the proposed regulations must be received by December 26, 2012. Please click on the link provided below to access the health insurance market reform fact sheet: http://www.healthcare.gov/news/factsheets/2012/11/market-reforms11202012a.html For a copy of the proposed health insurance market reform regulations, please click on the link provided below: http://www.gpo.gov/fdsys/pkg/FR-2012-11-26/pdf/2012-28428.pdf


2013 MEDICAL MILEAGE RATE ANNOUNCED BY IRS Transportation expenses, such as automobile mileage, that qualify as tax deductible medical expenses under Internal Revenue Code Section 213 generally can be paid or reimbursed on a tax-free basis by a health flexible spending arrangement, health reimbursement arrangement, or health savings account if the expense is “primarily for, and essential to, medical care.” On November 21, 2012, the Internal Revenue Service issued Notice 2012-72 announcing that the standard mileage rate, effective January 1, 2013, for use of an automobile to obtain medical care is 24 cents per mile. This represents an increase of one cent from the 2012 rate of 23 cents per mile. For a copy of Notice 2012-72 please click on the link provided below: http://www.irs.gov/pub/irs-drop/n-12-72.pdf IRS ISSUES GUIDANCE ON ADDITIONAL MEDICARE TAX

On November 30, 2012, the Internal Revenue Service (IRS) released proposed regulations and 47 “Questions and Answers” in relation to the additional 0.9% Medicare tax imposed on high earners starting effective January 1, 2013. The proposed rules appeared in the Federal Register on December 5, 2012, and provided a 90-day comment period. Background Effective for wages paid on or after January 1, 2013, the Medicare tax rate increases from 1.45 percent to 2.35 percent on wages earned above $200,000 for single filers and $250,000 for joint filers ($125,000 for a married individual filing separately). This increase only applies to the employee portion of the Federal Insurance Contributions Act (FICA) tax. Consequently, employers do not have to match the increased Medicare tax amount withheld from an employee’s wages. However, employers are still responsible for the withholding and reporting obligations with respect to the increased employee Medicare tax. If an employer fails to withhold and deposit the additional Medicare tax amount AND the employee pays it with their tax return, the employer will not be required to pay the missed amount, but the employer will be subject to penalties for the failure to withhold the tax. It is important to note that the employer is required to withhold the increased amount from all workers with wages


exceeding $200,000 regardless of the marital status claimed on the employee’s Form W-4. Over and under withholding for the employee will be reconciled upon the filing of that individual’s tax return. The IRS proposed regulations provide guidance for employers and individuals in relation to the implementation of the additional 0.9% “Additional Medicare Tax” (AMT) including the requirements to file a return to report the AMT. Also guidance is provided on the employer process for making adjustments of underpayments and overpayments of the AMT and the employer and employee processes for filing a claim for a refund for an overpayment of the AMT. A few of the highlights of the proposed regulations are as follows: In determining whether wages exceed $200,000 an employer may not take into

account the employee’s filing status or other wages that may impact the employee’s liability for the AMT.

An employee may not request that the employer deduct and withhold AMT on wages

of $200,000 or less. However, an employee may request that an employer withhold an additional amount of income tax withholding on Form W-4. The additional income tax withholding will be applied against the employee’s taxes shown on the employee’s individual income tax return (Form 1040), including any AMT liability.

However, if you anticipate liability for AMT, you may request that your employer withhold an additional amount of income tax withholding on Form W-4. The additional income tax withholding will be applied against your taxes shown on your individual income tax return (Form 1040), including any AMT liability.

The $200,000 withholding threshold applies to each single employer. However,

amounts disbursed by a common paymaster are treated as paid by a single employer.

To the extent that the AMT is not withheld by the employer, the employee remains

liable for the tax. The IRS will not collect the under withheld AMT amount from the employer if the employee subsequently pays the tax. However, the employer would be subject to any applicable penalties or additional tax due for failure to withhold the AMT as required.


Individual taxpayers must report the AMT on Form 1040 and any AMT due to the IRS that was not previously paid through withholding by the employer or estimated tax.

Employer adjustments for underpayments of the AMT on an interest-free basis can

only be made in the same year that wages/compensation are paid unless the underpayment is attributable to administrative error, worker misclassification or adjustment as a result of IRS examination. In general, the error must be ascertained within the same calendar year that the impacted employee’s wages/compensation was paid. The underpaid AMT must be collected from the employee on or before December 31 via payroll deductions. In addition, Form 941-X must be filed along with applicable tax due by the due date for filing a quarterly report for the quarter in which the error is ascertained.

An adjustment of overpaid AMT can be made only if the employer ascertains the

error in the year of the wages/compensation and reimburses the employee the amount of the overpaid AMT prior to the end of the calendar year. In addition, the employer must obtain and keep the written receipt evidencing the refund of the AMT to the employee showing the amount and date of the refund.

Employers can claim refunds of overpaid AMT ONLY if the employer did not deduct

or withhold the AMT from the employee’s wages or compensation.

Employees may claim a credit or request a refund of overpaid AMT by requesting as such on his/her Form 1040. The proposed regulations eliminate the requirements that the employee first seek a refund from the employer and provide a statement in support of the employee’s claim.

For a copy of the proposed regulations, please click on the link provided below. http://www.gpo.gov/fdsys/pkg/FR-2012-12-05/pdf/2012-29237.pdf As noted above, the IRS in conjunction with the proposed regulations released 47 “Questions and Answers” regarding the AMT. In its release, the IRS stated as follows: “The following questions and answers provide employers and payroll service providers information that will help them as they prepare to implement the Additional Medicare Tax which goes into effect in 2013. The Additional Medicare Tax applies to individuals’ wages, other compensation, and self-employment income over certain thresholds; employers are responsible for withholding the tax on wages and other compensation in


certain circumstances. The IRS has prepared these questions and answers to assist employers and payroll service providers in adapting systems and processes that may be impacted.” A sampling of the IRS Questions and Answers are as follows: 8. Are wages that are not paid in cash, such as fringe benefits, subject to Additional Medicare Tax?

Yes, the value of taxable wages not paid in cash, such as noncash fringe benefits, are subject to Additional Medicare Tax, if, in combination with other wages, they exceed the individual’s applicable threshold. Noncash wages are subject to Additional Medicare Tax withholding, if, in combination with other wages paid by the employer, they exceed the $200,000 withholding threshold. 24. Is an employer liable for Additional Medicare Tax even if it does not withhold it from an employee’s wages?

An employer that does not deduct and withhold Additional Medicare Tax as required is liable for the tax unless the tax that it failed to withhold from the employee’s wages is paid by the employee. Even if not liable for the tax, an employer that does not meet its withholding, deposit, reporting, and payment responsibilities for Additional Medicare Tax may be subject to all applicable penalties. 25. Is an employer required to notify an employee when it begins withholding Additional Medicare Tax? No. There is no requirement that an employer notify its employee. 26. Is there an “employer match” for Additional Medicare Tax (as there is with the regular Medicare tax)?

No. There is no employer match for Additional Medicare Tax. 30. I have two employees who are married to each other. Each earns $150,000, so I know that their combined wages will exceed the threshold applicable to married couples that file jointly. Do I need to withhold Additional Medicare tax?

No. An employer should not combine wages it pays to two employees to determine whether to withhold Additional Medicare Tax. An employer is required to withhold


Additional Medicare Tax only when it pays wages in excess of $200,000 in a calendar year to an employee. 39. If an agent pays wages to an employee on behalf of an employer (under an approved Form 2678, Employer Appointment of Agent), then, for purposes of determining whether wages are paid in excess of the $200,000 withholding threshold, should the agent combine those wages with wages paid to that same employee

directly by the employer, by the same agent on behalf of a different employer, or by another agent on behalf of the same employer?

No. Wages paid by an agent with an approved Form 2678 on behalf of an employer should not be combined with wages paid to the same employee by any of the above other parties in determining whether to withhold Additional Medicare Tax. 41. Will the IRS be changing Form 941 or any other forms for tax year 2013 to be completed by employers and payroll service providers?

Yes. For example, a line will be added to Form 941 on which employers will report any individual’s wages paid during the quarter that is in excess of $200,000 for the year, and on which employers will report their withholding liability for Additional Medicare Tax on those wages. The existing line, on which employers report the liability for regular Medicare tax on all wages, will remain unchanged. However, there will be no change to Form W-2. Additional Medicare Tax withholding on wages subject to Federal Insurance Contributions Act (FICA) taxes will be reported in combination with withholding of regular Medicare tax in box 6 (“Medicare tax withheld”). The IRS plans to release drafts of revised forms, including Forms 941, 943, and the tax return schemas for the F94X series of returns. For a copy of the 47 IRS Questions and Answers on the AMT, please click on the link provide below: http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Questions-and-Answers-for-the-Additional-Medicare-Tax


IRS RELEASES 2013 AUTOMOBILE BUSINESS USE MILEAGE RATE On November 21, 2012, the Internal Revenue Service issued Notice 2012-72 announcing the 2013 optional standard mileage rates used to calculate the deductible costs of operating an automobile for business, charitable, and moving purposes. As of January 1, 2013, the standard mileage rates for the use of a car (including vans, pickups or panel trucks) will be:

56.5 cents per mile for business miles driven; 24 cents per mile driven for moving purposes; and 14 cents per mile driven in service to a charitable organization.

The difference between the 2012 rates and the 2013 rates are demonstrated in the chart below: Type of Mileage Driven

2012 Rate 2013 Rate Difference

Business miles 55.5 cents per mile

56.5 cents per mile

+1.0 cents per mile

Moving miles 23 cents per miles 24 cents per mile +1.0 cents per mile

Service of charitable organization

14 cents per mile 14 cents per mile No change

The standard mileage rates for business and moving purposes are based on an annual study of the fixed and variable costs of operating an automobile. The mileage rate for charitable miles is set by statute and remains at 14 cents per mile. For a copy of Notice 2012-72 please clink on the link provided below: http://www.irs.gov/pub/irs-drop/n-12-72.pdf


COLORADO INCREASES MINIMUM WAGE The Colorado Constitution requires the Colorado minimum wage to be adjusted annually for inflation, as measured by the Consumer Price Index used for Colorado. In accordance with the constitutional inflation adjustment requirement, effective January 1, 2013, Colorado’s minimum wage will increase to $7.78 per hour, up from the 2012 rate of $7.64 per hour. Also, the tipped employee wage will rise to $4.76 per hour, up from the current $4.62 per hour. If an employee is covered by federal and Colorado state minimum wage laws, then the employer must pay the higher minimum wage. Federal minimum wage is currently $7.25 per hour, which is lower than the Colorado state minimum wage of $7.78. Therefore, based upon current information, covered employers in Colorado will have to pay their employees the higher value of $7.78 per hour under Colorado law beginning January 1, 2013. Also, if an employee is covered by federal and Colorado state minimum wage laws, then the employer must pay the higher minimum wage for tipped employees. Federal tipped minimum wage is currently $2.13 per hour, which is lower than the Colorado tipped minimum wage of $4.76 per hour. Therefore, based upon current information, covered employers in Colorado will have to pay their tipped employees the higher value of $4.76 per hour under Colorado law beginning January 1, 2013. If an employee's tips combined with the employer's cash wage of at least $4.76 per hour do not equal the minimum hourly wage, the employer must make up the difference in cash wages.


MINIMUM WAGE RAISED IN VERMONT Vermont law stipulates that “beginning January 1, 2007, and on each subsequent January 1, the minimum wage rate shall be increased by five percent or the percentage increase of the Consumer Price Index, CPI-U, U.S. city average, not seasonally adjusted, or successor index, as calculated by the United States Department of Labor or successor agency for the 12 months preceding the previous September 1, whichever is smaller. The minimum wage shall round off to the nearest $0.01.” In accordance, the minimum wage rate in Vermont effective January 1, 2013 will be changing from $8.46 per hour to $8.60 per hour representing an increase of 14 cents per hour. The tipped employee minimum hourly rate will be changing from $4.10 per hour to $4.17 per hour in direct (cash) wages. Therefore, the maximum tip credit will be changing from $4.36 per hour to $4.43 per hour. ($4.17 + $4.43 = $8.60). It is important to note that there is no training/youth wage, opportunity wage or subminimum wage rate in Vermont.

Please contact ADP National Account Services for further information at:

21520 30th Drive SE Suite 200 Bothell, WA 98021 Phone: (425) 415-4800 Fax: (425) 482-4527

ADP National Account Services does not make any representation or warranty that the information contained in this newsletter, when used in a specific and actual situation, meets applicable legal requirements. This newsletter is provided solely as a courtesy and should not be construed as legal advice. The information in this newsletter represents informational highlights and should not be considered a comprehensive review of legal and compliance activity. Your legal counsel should be consulted for updates on law and guidance that may have an impact on your organization and the specific facts related to your business.

**Please note that the information provided in this document is current as of the date it is originally published.**

December 2012 Tech Flex: Benefits and Payroll

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