Compliance Central

The Internal Revenue Service released guidance on the expanded adoption credit and income exclusion for employer reimbursements that is available for tax year 2010 as expanded by the Patient Protection and Affordable Care Act (PL 111-148).

The Affordable Care Act increased the maximum adoption credit per eligible child from $12,150 in 2009 to $13,170 in 2010.  Also, beginning in 2010 and 2011, the act made the credit for qualified adoption expenses (QAEs) refundable, rather than subject to the prior-year carryover for up to five years of credit amounts that exceeded an income phaseout. Income limits and other special rules apply.

Those who claim the credit must fill out the new form (Form 8839) and also include adoption-relation documentation for verification as detailed in the IRS guidance.  These include items such as adoption fees, court costs, attorney’s fees and travel expenses.  If you adopt a special needs child, however, you may be eligible for the full credit amount, regardless of the amount of QAEs.

While the increase in the adoption credit amount is beneficial, claiming it unfortunately means that taxpayers will have to file paper returns in order to submit the required adoption documentation.  Taxpayers may still use IRS Free File to prepare their return but must print it out and send it to the IRS by mail.  Typically, a paper tax return takes 6-8 weeks to get processed, so the IRS is recommending that those claiming the credit use direct deposit to speed the receipt of their refund.

The IRS outlined the latest guidance in a news release (IR 2010-100). In addition, the IRS released a draft revised Form 8839, Qualified Adoption Expenses, reflecting the law changes.

The IRS provided guidance on statutory changes under the Patient Protection and Affordable Care Act (Affordable Care Act) (P.L. 111-148) regarding Health Savings Accounts (HSAs), Archer Medical Savings Accounts (Archer MSAs), Health Flexible Spending Arrangements (FSAs) and Health Reimbursement Arrangements (HRAs). The new rules, effective January 1, 2011 also applies to the 2.5-month grace period for the 2010 FSA year. Employers may also need to amend their Cafeteria plans to conform to the new over-the-counter drug requirements.

FSAs and HRAs

• For both FSAs and HRAs, over-the-counter (OTC) medicines or drugs purchased on or after January 1, 2011 will no longer be eligible for reimbursement unless a prescription is obtained. Claims for medicines or drugs purchased without a prescription in 2010 can still be reimbursed in 2011, if allowed by the employer’s plan. This change does not affect insulin, even if purchased without a prescription, or other health care expenses such as medical devices, eye glasses, contact lenses, co-pays and deductibles.

HSAs and Archer MSAs

• Since OTC drugs will no longer be a qualified medical expense unless prescribed by a doctor, a distribution from a Health Savings Account or Archer Medical Saving Account for an OTC drug will be tax-free only if it is prescribed.  This will only affect OTC purchases made on or after January 1, 2011.
• The additional tax for distributions from HSAs for non-qualified medical expenses increases from 10% to 20% and from 15% to 20% for Archer MSAs beginning January 1, 2011.

For details on current rules, see Publication 969. 

To read more about these changes, Notice 2010-59 and Revenue Ruling 2010-23 are available through the IRS website.

Changes are coming regarding Social Security Numbers (SSNs) and how they are assigned.  In order to maintain the integrity and increase the number of SSNs available, the Social Security Administration (SSA) is introducing random assignment of SSNs beginning in June 2011. 

 Effects of the changes

• The geographical significance of the first three digits of the SSN, also known as the area number, will be eliminated by no longer allocating the area numbers for assignment to applicants in specific states.
• The High Group List will be frozen and can be used for validation of SSNs issued prior to the randomization implementation date.
• Previously unassigned area numbers will be introduced for assignment (excluding area numbers 000, 666 and 900-999), which will expand the pool for the general population.  This will include SSNs that begin with the numbers “7” and “8”.  The number “8” has never been used as the first number of an SSN and SSNs with a “7” as the first number have been reserved for members of the Railroad Retirement System and for people from outside the US who are applying for an SSN.

The SSA advises that updates to computer programs may need to be made to ensure that these changes are supported.

Verification of a name and SSN

The SSA will still provide opportunities for direct SSN verification. Internet based verification services include the SSA’s Social Security Number Verification Service for employers, eVerify, (the Department of Homeland Security’s Service for Employers to determine Employment Eligibility) and the SSA’s Consent-Based SSN Verification Service.

Read more about the changes at http://www.ssa.gov/employer/randomization.html.

September 13 – 17, 2010 is National Payroll Week in Canada.  This week allows us to recognize the accomplishments of payroll professionals, the payroll community and the Canadian Payroll Association and to learn about the impact that payroll has on business, government and employees across Canada.  Visit http://www.npw-snp.ca/AM/Template.cfm?Section=Home to learn more and to find a National Payroll Week event near you!