The Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) (P.L. 107-16) contained several income tax provisions that sunset on December 31, 2010. Under President Bush’s proposed 2008 budget, these provisions would be permanently extended.
FUTA surtax
The proposal would extend the 0.2% FUTA surtax through December 31, 2012.
Work Opportunity Tax Credit (WOTC)
The WOTC would be extended to employers for qualified wages paid to eligible target group employees who begin work after September 31, 2007, and before January 1, 2009.
Employment taxes
The exception to the requirement for pre-levy collection due process (CDP) proceedings would be expanded to include levies issued to collect federal employment taxes. As with the current procedures applicable to levies issued to collect a federal tax liability from state tax refunds, the taxpayer would be provided an opportunity for a CDP hearing within a reasonable period of time after the levy. Collection by levy would be allowed to continue during the CDP proceedings. Taxpayers would retain their current right to seek managerial appeal of a proposed levy and to participate in the formal collection appeals process before a levy is issued. The proposal would be effective for levies issued on or after January 1, 2008.
Leasing companies
Standards for holding employee leasing companies jointly and severally liable with their clients for federal employment taxes would be set. In addition, standards would be set for holding employee leasing companies solely liable for such taxes if they meet specified requirements. The provision would be effective for employment tax returns filed with respect to wages paid on or after January 1, 2008.
Employer-based pensions
The proposal would consolidate those types of defined-contribution accounts that permit employee deferrals or employee after-tax contributions, including Code Sec. 401(k), SIMPLE Code Sec. 401(k), Thrift, Code Sec. 403(b), and Governmental Code Sec. 457(b) plans, as well as SIMPLE IRAs and SARSEPs, into Employer Retirement Savings Accounts (ERSAs), which would be available to all employers and have simplified qualification requirements. The proposal would be effective for years beginning after December 31, 2007. ERSAs would follow the existing rules for Code Sec. 401(k) plans, subject to the plan qualification simplifications described below. Thus, employees could defer wages of up to $15,500 annually, with employees aged 50 and older able to defer an additional $5,000 in 2007. The maximum total contribution (including employer contributions) to ERSAs would be the lesser of 100% of compensation or $45,000 in 2007. The taxability of contributions and distributions from an ERSA would be the same as contributions and distributions from the plans that the ERSA would be replacing. Thus, contributions could be pretax deferrals or after-tax employee contributions or Roth contributions, depending on the design of the plan. Distributions of Roth and non-Roth after-tax employee contributions and qualified distributions of earnings on Roth contributions would not be included in income. All other distributions would be included in the participants’ income. Existing Code Sec. 401(k) and Thrift plans would be renamed ERSAs and could continue to operate as before, subject to the simplification described below. Existing SIMPLE Code Sec. 401(k) plans, SIMPLE IRAs, SARSEPs, Code Sec. 403(b) plans, and governmental Code Sec. 457(b) plans could be renamed ERSAs and be subject to ERSA rules, or could continue to be held separately, but if held separately could not accept any new contributions after December 31, 2008, with a special transition for collectively bargained plans and plans sponsored by state and local governments.
Pensions
The proposal would consolidate the three types of current law IRAs into a single account: a Retirement Savings Account (RSA). RSAs would be dedicated solely to retirement savings; other withdrawals would be subject to tax and penalties, effective January 1, 2008.
Unemployment insurance
Incentives for the recovery of state unemployment benefit overpayments and delinquent employer taxes would be increased. In addition, states could redirect up to 5% of overpayment recoveries to additional enforcement activity. The proposal would require states to impose a penalty of at least 15% on recipients of fraudulent overpayments, and penalty revenue would be used exclusively for additional enforcement activity. States would be prohibited from relieving an employer of benefit charges due to a benefit overpayment if the employer had caused the overpayment. In certain circumstances relating to fraudulent overpayment of delinquent employer taxes, states would be allowed to permit private collection agencies to retain a portion (up to 25%) of any amounts collected. At the request of a state, the Secretary of the Treasury would collect benefit overpayments due to a state from any income tax refund owed to a benefit recipient. The proposal would allow states to deposit up to 5% of moneys recovered in the course of a UI tax investigation into a special fund dedicated to implementing the State Unemployment Tax Act (SUTA) Dumping Prevention Act of 2004 or enforcing state laws relating to employer fraud or tax evasion. Employers would be required to report a “start work date” to the National Directory of New Hires for all new hires. Finally, the proposal would authorize the Secretary of Labor to waive certain requirements to allow states to conduct Demonstration Projects geared to reemployment of individuals eligible for unemployment benefits. The provisions would be effective as of the date of enactment.
Standard deduction for health insurance (SDHI)
A standard deduction for health insurance (SDHI) of $15,000 for family coverage ($7,500 for single coverage) would be provided to all families who purchase health insurance that meets minimum requirements, whether directly or through an employer. The new SDHI would replace the existing exclusion for employer-based health insurance, the self-employed premium deduction, and the medical itemized deduction for those not enrolled in Medicare (typically those under 65 years of age). The current exclusion or deduction from income of health care spending, whether for insurance premiums or out-of-pocket expenses, except under a Health Savings Account, also would be repealed. Itemized medical deductions would still be available for taxpayers enrolled in Medicare. Employers would be required to report the value of health insurance coverage to their employees on their annual Form W-2 and such amounts would be subject to withholding and employment taxes. Employers would exclude a pro-rated portion of the SDHI for employment tax purposes for their employees who have qualifying coverage. Withholding and estimated taxes could be adjusted to reflect the SDHI. Businesses would continue to deduct employer-based health insurance as a business expense. In addition, the phase-out rate for the EITC for taxpayers with qualifying children would be reduced to 15%, effective for tax years after December 31, 2008.
Health savings accounts (HSAs)
The existing rule that denies tax-free treatment for HSA funds used to pay medical expenses incurred prior to the establishment of the HSA would be changed so that HSA funds could be used to pay medical expenses incurred on or after the first day of eligibility in a particular year, as long as the HSA is established no later than the date for filing the return for that taxable year. This would provide more time for newly eligible taxpayers to set up their HSAs, effective for tax years beginning after December 31, 2007.
Penalties
An assessable penalty would be established for a failure to comply with a requirement of electronic (or other machine-readable) format for a return that is filed. The amount of the penalty would be $25,000 for a corporation or $5,000 for a tax-exempt organization. For failure to file in any format, the existing penalty would remain, and the proposed penalty would not apply. The proposal would be effective for returns required to be electronically filed on or after January 1, 2008.
