The Economic Growth and Tax Relief Reconciliation Act of 2001 Health and Welfare Plans

07/01/2001

Recently, President Bush signed into law the Economic Growth and Tax Relief Reconciliation Act of 2001 (the “Act”).  The Act includes many provisions that affect employee benefits.  Although most of the changes affect retirement plans, several changes affect health and welfare plans.  The following Client Alert summaries the provisions of the Act affecting health and welfare plans.
 
Educational Assistance Programs
 
Under current law, if an employer adopts an educational assistance plan that satisfies the requirements of Internal Revenue Code (the “Code”) Section 127, then educational assistance expenses are deductible by the employer, and excludable from the income of its employees.  Payments for graduate level courses do not currently qualify for the exclusion under Code Section 127.  The exclusion for educational assistance expires with respect to courses beginning after December 31, 2001.
 
The Act extends the exclusion for employer-provided educational assistance to graduate level courses.  Graduate level courses are those courses taken by an individual pursuing a program leading to a law, business, medical or similar advanced academic or professional degree.  Furthermore, the Act permanently extends employer-provided educational assistance beyond the December 31, 2001 expiration date; however, the Act’s provisions are scheduled to expire on December 31, 2010.  Consequently, this change should enable more employers to take advantage of the tax benefits of Code Section 127 since the uncertainty of the exclusion’s future has been eliminated.  The changes to educational assistance programs shall apply to expenses relating to courses beginning after December 31, 2001.
 
Qualified Retirement Planning Services under Code Section 132
 
Under current law, Code Section 132 provides that employer-provided fringe benefits are excludable from an employee’s income if certain conditions are satisfied.  Although there is not a specific exclusion for employer-provided retirement planning services, these services may be excludable as a de minimis fringe benefit or as a working condition fringe.  The Act provides that employer-provided qualified retirement planning services are excludable from an employee’s income under Code Section 132(a)(7).  As long as the retirement planning advice is provided on a nondiscriminatory basis, any retirement planning advice or information provided to an employee and his spouse by an employer maintaining a qualified employer plan qualifies for the exclusion subject to certain conditions.  For example, the exclusion does not apply to tax preparation, accounting, legal, or brokerage services.  The Code Section 132 exclusion applies to qualified retirement planning services offered to employees and their spouses for years beginning after December 31, 2001.
 
Child Care Assistance Tax Credit
 
Under current law, there are few tax incentives that encourage employers to provide child care benefits for their employees.  In order to provide an incentive for employers to provide child care for their employees, the Act provides for a new tax credit for certain child care expenses.  Employers are entitled to a credit equal to the sum of 25% of qualified child care expenditures and 10% of qualified child care resource and referral expenditures of the taxpayer.  The maximum credit allowable in any tax year is $150,000.  Expenditures that qualify for the credit include: (i) operating costs of a qualified child care facility; (ii) contracts to provide child care services to employees; and (iii) the costs to acquire, construct, rehabilitate or expand property to be used as a qualified child care facility.  The tax credit may be claimed starting with tax years beginning after December 31, 2001.
 
Expansion of the Employer Adoption Assistance Exclusion
 
Under current law, Code Section 137 provides that employer-provided adoption expenses are excludable from the employees’ income.  The exclusion is limited to $5,000 of adoption expenses per adoption.    Also, the exclusion is subject to income phase out rules.  The Act increases the maximum dollar limitation for employer-provided adoption assistance to $10,000 per eligible child.  Further, the Act increases the beginning point for the income phase out rules.  These changes apply to tax years beginning after December 31, 2001.
 
Employer Contributions to Education IRAs
 
Under current law, taxpayers may establish education IRAs to pay qualified higher education expenses to a named beneficiary.  Annual contributions to the education IRA are limited to $500 per beneficiary per year subject to income phase out limitations.  The Act increases the maximum annual contribution to $2,000 per beneficiary per year and increases the income phase out limitations.  The Act clarifies that corporations may contribute to education IRAs regardless of their income for the year.  Therefore, employers may make contributions to employees’ education IRAs.  These changes are effective for taxable years beginning after December 31, 2001.
 
Effective Date for Claims Procedure Regulation Delayed
 
On July 9, 2001, the U.S. Department of Labor delayed the effective date of the new claims procedure regulations for group health claims, from claims filed on or after January 1, 2002, to claims filed on or after the first plan year beginning on or after July 1, 2002 and in no event later than January 1, 2003.
 
If you have any questions about the Economic Growth and Tax Relief Reconciliation Act of 2001, please call any of the authors listed at the top of the page.

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