Obama Would End Dependent-Care FSAs, Add 401(k) W-2 Amounts in Budget Proposal

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By Michael Baer

President Barack Obama's fiscal year 2017 federal budget proposal includes repealing the $5,000-a-year employer-provided dependent-care flexible spending arrangement provision under Internal Revenue Code Section 129 and eliminating the Section 45B Federal Insurance Contributions Act tax credit on tip income for employers.

The proposal also calls for employers to include the amounts of their contributions to 401(k)-type defined contribution plans on future Forms W-2.

New Child-Care Tax Credit Envisioned

The elimination of the dependent-care FSA would coincide with the development of a proposed program that would “reform and simplify tax incentives that help families save for retirement and pay for college and child care.” The proposal would triple the maximum Child and Dependent Care Tax Credit and create a larger credit for taxpayers with children younger than 5, according to the Treasury Department's budget explanation, called the Green Book.

Calling the employer FICA tip credit “inefficient and inequitable” in the Green Book, Obama proposed eliminating the credit employers may take for their share of FICA taxes for employee tip amounts, saying the favorable tax treatment on tips relative to other cash compensation “unduly encourages employers to provide income in the form of tips instead of wages.”

The budget proposal to change the reporting of contributions under qualified retirement plans would require employers to add their contributions to amounts of employee deferrals reported on Forms W-2. According to the Green Book, this “would provide workers with a better understanding of their overall retirement savings and compensation” and help facilitate compliance with annual limits on additions to such plans.

Unemployment Tax Changes Proposed

As in past budget proposals, the fiscal 2017 request would increase the Federal Unemployment Tax Act annual wage base to $40,000 from $7,000, but would cut the FUTA tax rate to 0.167 percent to compensate for the wage base increase. States would be required to increase unemployment wage bases to the higher federal level to receive the full FUTA credit. However, the 0.2 percent FUTA surtax, eliminated in 2011, would be reinstated under Obama's plan.

Another proposal would allow the Internal Revenue Service to issue guidance to help employers determine worker status.

The proposed budget for the Labor Department would expand to allow the agency to hire 300 more Wage and Hour examiners, and funds would be provided to states that implement paid-leave programs. More information return due dates would be accelerated, the standard mileage rate for volunteers would increase and the Work Opportunity Tax Credit would be permanently extended under Obama's budget proposal.

To contact the editor responsible for this story: Michael Trimarchi at mtrimarchi@bna.com.