July 16, 2007

Immigration reform | Minimum wage increase | FSA carry-forward legislation | Expanded Health Savings Account legislation

Immigration reform derailed for now
Minimum wage increase becomes law
Legislation to permit $500 FSA carry-forward in the works
Legislation introduced to expand Health Savings Accounts (HSAs)

Immigration reform derailed for now
The Senate immigration bill was dealt what may likely be a fatal blow on June 28, when Senators rejected Majority Leader Harry Reid's (D-NV) attempt to bring the legislation to a final vote. The bill was pulled from the Senate floor for now, but could be considered at a later date, although that appears unlikely at this point.

Key among the bill's provisions was a proposal to instate a mandatory Electronic Employment Verification System (EEVS) that all employers would be required to use to verify employees' work eligibility. This system would be based on the existing voluntary Basic Pilot program that allows employers to electronically screen new hires' I-9 information against federal Social Security Administration and Department of Homeland Security databases.

Under the Senate bill, all employers would have to use the system to verify new hires within 18 months of the legislation's enactment, and all employees' work information would have to be screened within three years.

This system would have posed some challenges for employers, and it is questionable whether the government would be able to effectively expand the current 15,000 participant Basic Pilot system to cover all seven million employers in the U.S. At the same time, the government would need to correct some isolated, but significant reliability problems employers have reported with the current program.

The EEVS was also included in separate versions of immigration reform legislation both the House and Senate passed in the last session of Congress. Although there is great controversy regarding a proposed guest worker program and a so-called "pathway to citizenship" for the estimated 12 million illegal immigrants who live in the U.S., there has been little opposition in Congress to implementing the mandatory EEVS.

While the larger immigration bill seems to be off the table for now, as several members of the Senate and House of Representatives have indicated, Congress could take up portions of the measure as stand-alone legislation later in the year -- including the mandatory EEVS.

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Minimum wage increase becomes law
On May 25, President Bush signed into law the first increase in the minimum wage in over a decade. Beginning July 24, 2007, the minimum wage will increase from $5.15 to $5.85. On July 24, 2008, the wage will go up to $6.55, and one year later it will rise again to $7.25 on July 24, 2009.

Wages will rise in 13 states/territories that follow the federal minimum wage rate -- New Mexico, North Dakota, South Dakota, Georgia, Indiana, Utah, Virginia, Oklahoma, New Hampshire, Texas, Idaho, Indiana and Puerto Rico. And in the five states with no minimum wage law -- Mississippi, South Carolina, Alabama, Louisiana and Tennessee -- the new federal minimum wage will apply to employees who are covered by the Fair Labor Standards Act (FLSA).

Employers should also be aware that calculations for creditor garnishments will be significantly affected by the federal wage increase. Creditor garnishments are usually issued through the court for the repayment of civil debts and are governed by federal and state law. Under the Consumer Credit Protection Act, the amount that can be garnished in any pay period is the lesser of 25 percent of an employee's disposable earnings or the amount by which disposable earnings are greater than 30 times the current federal minimum wage. While the 25 percent rule applies in most cases, states may have a lower percentage, and employers are required to use the percentage which is most favorable to the employee. For more detailed information regarding creditor garnishments, visit your state department of labor Web site or the federal Department of Labor Web site.

Small business tax package included in legislation
The bill also contains a small business tax package to help defray the cost the wage hike will pose to employers. The package extends and enhances several existing tax breaks for small businesses, including:

Section 179 small business expensing
Section 179 of the Internal Revenue Code allows small businesses to take a large deduction for the purchase of new equipment in the year it is purchased rather than taking smaller deductions for depreciation over several years. The new law provides an immediate increase in the expensing limit from $112,000 to $125,000, and this limit will be adjusted for inflation in subsequent years. The law also increases the phase out on qualifying purchases from $430,000 to $500,000.

The bill also extends the additional Section 179 expensing for businesses in "Go Zone" areas that were devastated by Hurricanes Katrina, Rita and Wilma. Under the new law, Go Zone businesses can expense $125,000 of equipment for 2007, which means that these businesses can expense up to $250,000 in eligible purchases under the combined Go Zone and regular Section 179 expensing.

Work Opportunity Tax Credit (WOTC)
WOTC benefits businesses that hire members of certain "target groups" such as food stamp and SSI recipients. The credit has been extended through September 30, 2011 for employees hired after December 31, 2007, and it has been expanded to allow employers to claim credit for hiring veterans and workers who live in counties that have suffered population loss.

Married couples with joint business venture
In addition, married couples who operate a joint business venture and file taxes jointly will be able to report each of their shares of income from the business. As a result, both individuals will be able get full credit for Social Security benefits. Under previous law, these couples had to report their business income in only one name or go through the complicated process of forming a partnership.

Tip credit
Tips received by restaurant employees are treated as wages for purposes of FICA taxes, which means employers pay taxes on the tips their employees receive. To offset this cost, the government allows employers to receive a business tax credit for the taxes they pay on employees' tip income that exceeds the federal minimum wage rate. In order to allow employers to continue to receive the present tip credit rate as the minimum wage increases, the bill freezes the minimum wage at $5.15 for purposes of calculating the credit. The minimum cash wage for qualified tipped employees will remain at $2.13, but employers will have to make up the difference if these employees' combined tips and wages do not equal the new minimum wage.

S Corporation rules modified
Electing to be treated as an S Corporation helps many small businesses lessen their tax burden. However, many of the regulations these businesses must follow are easy to break. The new legislation makes several favorable changes that will allow small businesses to more easily maintain their S Corporation status.

If you would like more information regarding the small business tax package or other provisions contained in the minimum wage legislation, please visit the Congress's Joint Committee on Taxation's Web site at: www.house.gov

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Legislation to permit $500 FSA carry-forward in the works
Rep. John Larson (D-CT) soon plans to introduce legislation to permit FSA holders to carry forward $500 in unused FSA funds from one plan year to the next. As the vice chair of the Democratic Caucus and a member of the Ways and Means Committee, which has authority over tax issues, Rep. Larson is in a unique position to pick up support for the bill and move it forward.

The FSA carry-forward would be a huge benefit for the thousands of employees who forfeit an estimated $1 billion each year in unspent FSA funds. We will have more on the legislation and its cosponsors once the bill is introduced.

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Legislation introduced to expand Health Savings Accounts (HSAs)
On June 12, Representative Charles W. Boustany, Jr. (R-LA) introduced H.R. 2639, the Promoting Health for Future Generations Act of 2007. If enacted, the bill would allow adult children to inherit individual-account health plans such as HSAs and make several other changes to HSA laws to expand their use and make them more compatible with FSAs.

According to a release from Rep. Boustany's office, H.R. 2639 would:

• Permit an adult child to inherit funds from an HSA or MSA without tax penalties.
• Increase the annual HSA contribution limit to $5,500 for individual coverage and $11,000 for family coverage.
• Allow seniors age 50 and over to make catch-up contributions of up to $2000 over the annual contribution limit.
• Allow Medicare eligible seniors and VA beneficiaries to continue to contribute to an HAS.
• Permit employees to contribute to an HSA even if their spouse has a Flexible Spending Account (FSA). Under current law, an individual may not contribute to an HSA if their spouse has an FSA, even if the individual never seeks to be reimbursed for any medical expenses from the spouse's FSA.
• Permit HSA funds to be spent or used to purchase coverage under a Medicare supplemental policy.
• Permit families to receive a tax deduction for premiums for high deductible health plans purchased on the individual market.
• Allow coverage for prescription drugs before the deductible is satisfied.
• Permit Medicare Advantage MSA plans to provide coverage before meeting the deductible for Medicare-covered preventive services.
• Allow individuals enrolled in Medicare MSAs to make contributions into the account.
• Permit seniors to use Medicare Advantage MSA funds for wellness and fitness programs.