Summary of Benefits-Related Provisions of the Working Families Tax Relief Act of 2004

CCH has a good overview of the Working Families Tax Relief Act of 2004 (H.R. 1308) which was adopted by the House on September 23 by a vote of 339-65 and by the Senate 92-3 on the same day. The…

CCH has a good overview of the Working Families Tax Relief Act of 2004 (H.R. 1308) which was adopted by the House on September 23 by a vote of 339-65 and by the Senate 92-3 on the same day. The bill now goes to the President for his signature.

Under the Act, Archer Medical Savings Account (“MSA”) provisions have been extended through December 31, 2005. Here is what the CCH report has to say about MSAs:

Archer MSAs have not fulfilled the initial vision of many lawmakers. Participation has lagged and now they have a new competitor: Health Savings Accounts (HSAs). Dan Perrin, Executive Director of the HSA Coalition in Washington, D.C. told CCH Tax & Accounting that HSAs are “supplanting MSAs in the marketplace. Ninety-nine percent of the time, consumers are converting to HSAs.” Perrin predicted that this trend would continue unabated in 2005. MSA balances may be rolled over into HSAs.

Also, the Act extends the ERISA and PHSA provisions relating to mental health parity to benefits for services furnished before January 1, 2006. The conference agreement also extends the Code provisions relating to mental health parity to benefits for services furnished on or after the date of enactment and before January 1, 2006. Thus, the excise tax on failures to meet the requirements imposed by the Code provisions does not apply after December 31, 2003, and before the date of enactment (i.e. under the legislation, there would be a “gap” period concerning the excise tax. The excise tax imposed on plans for failure to meet the mental health parity requirements would not apply after 2003 and before the date of enactment.)

In addition, the new law devotes a separate title to “Technical Corrections”, covering 15 major issues. Some of them relate to benefits as follows (taken directly from the Joint Explanatory Statement of the Committee of Conference):

Amendments Related to the Medicare Prescription Drug, Improvement, and Modernization Act of 2003:

Additional tax relating to health savings accounts.-Under present law, section 26(b) provides that “regular tax liability” does not include certain “additional taxes” and similar amounts. Under present law, regular tax liability does not include the additional tax on Archer MSA distributions not used for qualified medical expenses (sec. 220(f)(4)). The provision adds to the list of such amounts the additional tax on distributions not used for qualified medical expenses (sec. 223(f)(4)) under the rules relating to health savings accounts.

Health coverage tax credit–Under present law, section 35(g)(3) provides that any amount distributed from an Archer MSA will not be taken into account for purposes of determining the amount of health coverage tax credit (“HCTC”) an individual is eligible to receive. Under the provision, section 35(g)(3) is amended to provide that amounts distributed from health savings accounts are not to be taken into account for purposes of determining the amount of HCTC an individual is entitled to receive.

Amendments Related to the Economic Growth and Tax Relief Reconciliation Act of 2001:

Rounding rule for retirement plan benefit and contribution limits.-Section 611 of EGTRRA increases the dollar limits on qualified retirement plan benefits and contributions under Code section 415, and adds a new rounding rule for cost-of-living adjustments to the dollar limit on annual additions to defined contribution plans. This new rounding rule is in addition to a pre-existing rounding rule that applies to benefits payable under defined benefit plans. The provision clarifies that the pre-existing rounding rule applies for purposes of other Code provisions that refer to Code section 415 and do not contain a specific rounding rule.

Excise tax on nondeductible contributions.-Under section 614 of EGTRRA, the limits on deductions for employer contributions to qualified retirement plans do not apply to elective deferrals, and elective deferrals are not taken into account in applying the deduction limits to other contributions. The provision makes a conforming change to the Code provision that applies an excise tax to nondeductible contributions.

SIMPLE plan contributions for domestic or similar workers.-Section 637 of EGTRRA provides an exception to the application of the excise tax on nondeductible retirement plan contributions in the case of contributions to a SIMPLE IRA or SIMPLE section 401(k) plan that are nondeductible solely because they are not made in connection with a trade or business of the employer (e.g., contributions on behalf of a domestic worker). Section 637 of EGTRRA did not specifically modify the present-law requirement that compensation for purposes of determining contributions to a SIMPLE plan must be wages subject to income tax withholding, even though wages paid to domestic workers are not subject to income tax withholding. The provision revises the definition of compensation for purposes of determining contributions to a SIMPLE plan to include wages paid to domestic workers, even though such amounts are not subject to income tax withholding.

Rollovers among various types of retirement plans.-Section 641 of EGTRRA expanded the rollover rules to allow rollovers among various types of tax-favored retirement plans. The provision makes a conforming change to the cross-reference to the rollovers rules in the Code provision relating to qualified retirement annuities.

Amendment Related to the Small Business Job Protection Act of 1996:

Defined contribution plans.-The Small Business Job Protection Act of 1996 amended section 401(a)(26) (generally requiring that a qualified retirement plan benefit the lesser of 50 employees or 40 percent of the employer’s workforce) so that it no longer applies to defined contribution plans. Section 401(a)(26)(C) (which treats employees as benefiting in certain circumstances) was not repealed even though it relates only to defined contribution plans. The provision repeals section 401(a)(26)(C).

Some helpful links regarding the Act:

Working Families Tax Relief Act of 2004 (H.R. 1308)
Committee on Ways and Means, Summary of Conference Report
Joint Explanatory Statement of the Committee of Conference
Thomas Bill Summary & Status

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