Source: https://www.irs.gov/irb/2012-26_IRB
Timestamp: 2019-04-25 08:04:17+00:00

Document:
Interest rates; underpayments and overpayments. The rates for interest determined under section 6621 of the Code for the calendar quarter beginning July 1, 2012, will be 3 percent for overpayments (2 percent in the case of a corporation), 3 percent for the underpayments, and 5 percent for large corporate underpayments. The rate of interest paid on the portion of a corporate overpayment exceeding $10,000 will be 0.5 percent.
This notice provides guidance on the limits in section 125(i) of the Code on salary reduction contributions to health flexible spending arrangements, effective for cafeteria plan years beginning after December 31, 2012, and also requests comments on possible modification to the “use-or-lose” rule in the proposed section 125 regulations.
Credit for carbon dioxide sequestration; 2012 section 45Q inflation adjustment factor. This notice publishes the inflation adjustment factor for the carbon dioxide (CO2) sequestration credit under section 45Q of the Code for calendar year 2012.
Weighted average interest rate update; corporate bond indices; 30-year Treasury securities; segment rates. This notice contains updates for the corporate bond weighted average interest rate for plan years beginning in June 2012; the 24-month average segment rates; the funding transitional segment rates applicable for June 2012; and the minimum present value transitional rates for May 2012.
This announcement is seeking comments from the public regarding an interim guidance memo (IGM) issued to its examiners relating to Rev. Rul. 2012-18, published elsewhere in this Bulletin. The IGM provides audit issue direction to examiners in dealing with issues concerning the proper treatment of tips and service charges. This announcement also announces plans to solicit comments in the future regarding possible changes to voluntary tip compliance agreements.
This notice provides an extension of time to pay under section 6651 of the Code to eligible civilian spouses of military servicemembers who work in American Samoa, Guam, the Northern Mariana Islands, Puerto Rico, or the U.S. Virgin Islands (each a “U.S. territory”) and claim residence or domicile for tax purposes in a State or the District of Columbia pursuant to the Military Spouses Residency Relief Act (“MSRRA”), for tax year 2011 and subsequent tax years. In addition, this notice provides that civilian spouses of military servicemembers working in a State or the District of Columbia but claiming residence or domicile for tax purposes in a U.S. territory under MSRRA should follow the procedures described in Notice 2010-30 with respect to their individual income tax returns for tax year 2011 and subsequent tax years.
Section 3121(a) of the Code defines “wages” for FICA tax purposes as all remuneration for employment, with certain exceptions. Section 3121(a)(12)(A) excludes from the definition of wages tips paid in any medium other than cash; section 3121(a)(12)(B) excludes cash tips received by an employee in any calendar month in the course of the employee’s employment by an employer unless the amount of the cash tips is $20 or more.
Employer FICA Obligations. Under section 3121(q) of the Code, tips received by an employee in the course of the employee’s employment are considered remuneration for that employment and are deemed to have been paid by the employer for purposes of the employer share of FICA taxes imposed by sections 3111(a) and (b), that is, social security tax and Medicare tax, respectively. The remuneration is deemed to be paid when a written statement including the tips is furnished to the employer by the employee pursuant to section 6053(a), discussed below.
Section 3111 of the Code requires the employer to pay social security tax on the amount of cash tips received by the employee up to and including the contribution and benefit base as determined under section 3121(a)(1) and to pay Medicare tax on the total amount of cash tips received by the employee. However, if the employee either did not furnish the statement pursuant to section 6053(a) or if the statement furnished was inaccurate or incomplete, in determining the employer’s liability in connection with the taxes imposed by section 3111 with respect to the tips, section 3121(q) provides that the remuneration is deemed, for purposes of subtitle F (Procedure and Administration), to be paid on the date on which notice and demand for the taxes is made to the employer by the Internal Revenue Service (Service).
Section 6053(a) of the Code requires every employee who, in the course of the employee’s employment by an employer, receives in any calendar month tips that are wages (as defined in section 3121(a) for FICA tax purposes or section 3401(a) for income tax withholding purposes) to report all those tips in one or more written statements furnished to the employer on or before the 10th day of the following month. The employee is to furnish the statements in the form and manner prescribed by the Service. See § 31.6053-1(b) of the Employment Tax Regulations.
Credit for Employer Share of FICA Taxes Paid. Section 45B(a) of the Code provides that, for purposes of the general business credit under section 38, the credit for employer social security and Medicare taxes paid on certain employee tips is an amount equal to the “excess employer social security tax” paid or incurred by the employer. The term “excess employer social security tax” means any tax paid by an employer under section 3111 (both social security tax and Medicare tax) on its employees’ tip income without regard to whether the employees reported the tips to the employer pursuant to section 6053(a). Consequently, the section 45B credit is available with respect to unreported tips in an amount equal to the “excess employer social security tax” paid or incurred by the employer. No credit, however, is allowed to the extent tips are used to meet the federal minimum wage rate. For purposes of this limitation, the federal minimum wage rate is the rate that was in effect on January 1, 2007. The credit is available with respect to FICA taxes paid on tips received from customers in connection with the providing, delivering, or serving of food or beverages for consumption, if it is customary for customers to tip the employees.
Q1. Is the characterization of a payment as a “tip” by the employer determinative for FICA tax purposes under section 3121 of the Code?
A1. No. The employer’s characterization of a payment as a “tip” is not determinative. For example, an employer may characterize a payment as a tip, when in fact the payment is a service charge. The criteria of Rev. Rul. 59-252, 1959-2 C.B. 215, should be applied to determine whether a payment made in the course of employment is a tip or non-tip wages under section 3121 of the Code. The revenue ruling provides that the absence of any of the following factors creates a doubt as to whether a payment is a tip and indicates that the payment may be a service charge: (1) the payment must be made free from compulsion; (2) the customer must have the unrestricted right to determine the amount; (3) the payment should not be the subject of negotiation or dictated by employer policy; and (4) generally, the customer has the right to determine who receives the payment. All of the surrounding facts and circumstances must be considered. For example, Rev. Rul. 59-252 holds that the payment of a fixed charge imposed by a banquet hall that is distributed to the employees who render services (e.g., waiter, busser, and bartender) is a service charge and not a tip. Thus, to the extent any portion of a service charge paid by a customer is distributed to an employee it is wages for FICA tax purposes.
Example A: Restaurant W’s menu specifies that an 18% charge will be added to all bills for parties of 6 or more customers. Customer D’s bill for food and beverages for her party of 8 includes an amount on the “tip line” equal to 18% of the price for food and beverages and the total includes this amount. Restaurant W distributes this amount to the waitresses and bussers. Under these circumstances, Customer D did not have the unrestricted right to determine the amount of the payment because it was dictated by employer policy. Customer D did not make the payment free from compulsion. The 18% charge is not a tip within the meaning of section 3121 of the Code. The amount included on the tip line is a service charge dictated by Restaurant W.
Example B: Restaurant X includes sample calculations of tip amounts beneath the signature line on its charge receipts for food and beverages provided to customers. The actual tip line is left blank. Customer G’s charge receipt shows sample tip calculations of 15%, 18% and 20% of the price of food and beverages. Customer G inserts the amount calculated at 15% on the tip line and adds this amount to the price of food and beverages to compute the total. Under these circumstances, Customer G was free to enter any amount on the tip line or leave it blank; thus, Customer G entered the 15% amount free from compulsion. Customer G and Restaurant X did not negotiate the amount nor did Restaurant X dictate the amount. Customer G generally determined who would get the amount. The amount Customer G entered on the tip line is a tip within the meaning of section 3121 of the Code.
A2. All cash tips received by an employee are wages for FICA tax purposes and, therefore, must be reported to the employer unless the cash tips received by the employee during a single calendar month while working for the employer total less than $20. If an employee works for more than one employer during a month and receives less than $20 in tips while working for each employer, no tips are required to be reported to any of the employers. Cash tips include tips received from customers, charged tips (e.g., credit and debit card charges) distributed to the employee by his or her employer, and tips received from other employees under any tip-sharing arrangement. Thus, both directly and indirectly tipped employees must report tips received to their employer. Non-cash tips (i.e., tips received by an employee in any other medium than cash, such as passes, tickets, or other goods or commodities) from customers are not wages for FICA tax purposes and are not reported to the employer. All cash tips and non-cash tips are includable in an employee’s gross income and subject to federal income taxes.
A3. The employee must give the employer a written statement (or statements) of cash tips by the 10th day of the month after the month in which the tips are received. Form 4070, Employee’s Report of Tips to Employer, is available for this purpose and may be found in Publication 1244, Employee’s Daily Record of Tips and Report to Employer. The statement may be furnished on paper or transmitted electronically. See § 31.6053-1(b) of the regulations.
A4. The employer withholds the employee share of FICA taxes on the reported tips from the wages of the employee (other than tips) or from other funds made available by the employee for this purpose. See section 3102(c) of the Code and §§ 31.3102-3 and 31.3402(k)-1(c) of the regulations. The employer pays both employer and employee shares of FICA taxes in the same manner as the taxes on the employee’s non-tip wages and includes the reported tips on the employee’s Form W-2, Wage and Tax Statement. The employer makes a current period adjustment on Form 941, Employer’s QUARTERLY Federal Tax Return, to reflect any uncollected employee FICA taxes on reported tips. The employer reports any uncollected employee FICA taxes on the employee’s Form W-2, Wage and Tax Statement. The employee must report these amounts as additional tax on the employee’s Form 1040, U.S. Individual Income Tax Return (or other applicable return in the Form 1040 series).
Q6. Which year’s social security and Medicare rates and social security contribution and benefit base apply to compute the employee’s FICA tax liability on unreported tips?
A6. The social security and Medicare rates and the social security contribution and benefit base applicable to the calendar year in which the tips were actually received apply to compute the employee’s FICA tax liability. Form 4137 includes the applicable social security and Medicare rates and social security contribution and benefit base. The employer is not liable to withhold and pay the employee share of FICA taxes on the unreported tips.
A7. Yes. Under section 6652(b) of the Code, an employee who fails to report tips required to be reported to an employer is subject to a penalty equal to 50 percent of the employee share of FICA taxes on those tips, unless the employee can provide a satisfactory explanation showing that the failure was due to reasonable cause and not due to willful neglect. The explanation must be made in the form of a written statement setting forth all the facts alleged as a reasonable cause. This statement can be attached to the employee’s Form 1040 (See Form 4137). If the statement is submitted in response to a notice regarding a proposed penalty assessment, the statement must contain a declaration that it is made under the penalties of perjury.
A9. There is no specific form or procedure prescribed for a Section 3121(q) Notice and Demand. Notice and demand is made by the Service when it advises the employer in writing of the amount of tips received by an employee (or employees) who failed to report or underreported tips to the employer. Although no specific form is prescribed, a document will constitute a Section 3121(q) Notice and Demand if it (1) includes the words “notice and demand” and “section 3121(q),” (2) states the amount of tips received by the employee (or employees), and (3) states the period to which the tips relate. However, a document including such information will not constitute a Section 3121(q) Notice and Demand if it states that it is not a notice and demand.
A10. The employer reports the amount of the section 3121(q) FICA tax liability as a current period liability for FICA taxes on the employer’s Form 941 for the calendar quarter in which notice and demand is made. Employers should consult the Instructions for Form 941 to determine the correct line entry on Form 941. The employer must also include the amount of the section 3121(q) FICA tax liability on the appropriate line of the record of federal tax liability (Part 2 of Form 941 for a monthly depositor or Schedule B (Form 941) for a semi-weekly depositor) corresponding to the date of the Section 3121(q) Notice and Demand.
Q11. Which year’s social security and Medicare rates and social security contribution and benefit base apply to compute the employer’s FICA tax liability on unreported tips?
A11. The social security and Medicare rates and the social security contribution and benefit base applicable to the calendar year in which the tips were actually received apply to compute the employer’s FICA tax liability. The Service will compute the employer’s liability, and include a calculation worksheet with the Section 3121(q) Notice and Demand.
Q12. If the Service determines that an employer’s employees have unreported tips and issues a Section 3121(q) Notice and Demand to the employer, what is the period of limitations for the Service to assess the employer share of FICA taxes?
Q13. Is the employer liable for interest on the employer’s FICA tax liability for unreported tips?
A15. The section 45B credit is applied to the taxable year that the “excess social security tax” amount is paid or incurred. The section 45B(b)(1) definition of “excess social security tax” is limited to tips that “are deemed to have been paid by the employer to the employee pursuant to section 3121(q).” Under this definition of “excess social security tax,” such tax cannot be paid or incurred prior to the time that the tip amounts are deemed to have been paid under section 3121(q), which occurs on the date on which notice and demand for the employer share of FICA taxes is made to the employer. Therefore, the section 45B credit is available to the employer in the year the Section 3121(q) Notice and Demand is made and not the year in which the unreported tips were received by the employee. The credit is claimed on Form 8846, Credit for Employer Social Security and Medicare Taxes Paid on Certain Employee Tips.
The federal short-term rate determined in accordance with section 1274(d) during April 2012 is the rate published in Revenue Ruling 2012-13, 2012-19 I.R.B. 878, to take effect beginning May 1, 2012. The federal short-term rate, rounded to the nearest full percent, based on daily compounding determined during the month of April 2012 is 0 percent. Accordingly, an overpayment rate of 3 percent (2 percent in the case of a corporation) and an underpayment rate of 3 percent are established for the calendar quarter beginning July 1, 2012. The overpayment rate for the portion of a corporate overpayment exceeding $10,000 for the calendar quarter beginning July 1, 2012, is 0.5 percent. The underpayment rate for large corporate underpayments for the calendar quarter beginning July 1, 2012, is 5 percent. These rates apply to amounts bearing interest during that calendar quarter.
The 3 percent rate also applies to estimated tax underpayments for the third calendar quarter in 2012.
Interest factors for daily compound interest for annual rates of 0.5 percent are published in Appendix A of this Revenue Ruling. Interest factors for daily compound interest for annual rates of 2 percent, 3 percent and 5 percent are published in Tables 57, 59, and 63 of Rev. Proc. 95-17, 1995-1 C.B. 611, 613, and 617.
The principal author of this revenue ruling is A.M. Gulas of the Office of Associate Chief Counsel (Procedure & Administration). For further information regarding this revenue ruling, contact Ms. Gulas at (202) 622-4570 (not a toll-free call).
This notice provides guidance on the effective date of the $2,500 limit (as indexed for inflation) on salary reduction contributions to health flexible spending arrangements (health FSAs) under § 125(i) of the Internal Revenue Code (Code) (the $2,500 limit) and on the deadline for amending plans to comply with that limit. This notice also provides relief for certain contributions that mistakenly exceed the $2,500 limit and that are corrected in a timely manner. Finally, the notice requests comments on whether to modify the use-or-lose rule that is currently set forth in the proposed regulations with respect to health FSAs.
relief is provided for certain salary reduction contributions exceeding the $2,500 limit that are due to a reasonable mistake and not willful neglect and that are corrected by the employer.
The statutory $2,500 limit under § 125(i) applies only to salary reduction contributions under a health FSA, and does not apply to certain employer non-elective contributions (sometimes called flex credits), to any types of contributions or amounts available for reimbursement under other types of FSAs, health savings accounts, or health reimbursement arrangements, or to salary reduction contributions to cafeteria plans that are used to pay an employee’s share of health coverage premiums (or the corresponding employee share under a self-insured employer-sponsored health plan).
A § 125 cafeteria plan is a written plan that allows employees to elect between permitted taxable benefits (such as cash) and certain qualified benefits. Section 125(a), (d)(1). If an employee makes the election before the start of the plan year, and other § 125 requirements are satisfied, the employee’s election of one or more qualified benefits does not result in gross income to the employee.
In 2007, the Treasury Department and the Internal Revenue Service (IRS) published proposed regulations under § 125. 72 Fed. Reg. 43938 (Aug. 6, 2007). Taxpayers may rely on the proposed regulations. The proposed regulations require a written cafeteria plan providing a health FSA to specify the maximum salary reduction contribution as a maximum dollar amount, a maximum percentage of compensation, or other method of determining the maximum salary reduction contribution. See Prop. Treas. Reg. § 1.125-1(c). If a cafeteria plan fails to operate in compliance with § 125 or fails to satisfy any of the written plan requirements for health FSAs, the plan is not a § 125 cafeteria plan and an employee’s election of nontaxable benefits results in gross income to the employee. For additional guidance, see Prop. Treas. Reg. § 1.125-1(c)(1), (c)(6) and (c)(7).
A cafeteria plan may include a grace period of up to two months and 15 days immediately following the end of a plan year. If the plan provides for a grace period, an employee may use amounts remaining from the previous plan year (including amounts remaining in a health FSA) to pay for expenses incurred for certain qualified benefits during the grace period. See Notice 2005-42, 2005-1 C.B. 1204, and Prop. Treas. Reg. § 1.125-1(e).
Section 125(i) was added by § 9005 of the Patient Protection and Affordable Care Act (the Act), Pub. L. No. 111-148 (as amended by § 10902 of the Act, and further amended by § 1403(b) of the Health Care and Education Reconciliation Act of 2010, Pub. L. No. 111-152). Section 125(i) is effective for “taxable years” beginning after December 31, 2012. Prior to the effective date of § 125(i), plan sponsors imposed limits on the amount of salary reduction contributions that employees may elect to health FSAs, but there has been no statutory limit.
Section 125(i) provides that a health FSA is not treated as a qualified benefit unless the cafeteria plan “provides that an employee may not elect for any taxable year to have salary reduction contributions in excess of $2,500 made to such arrangement.” Because employees make salary reduction contribution elections for health FSAs only on a plan year basis (see Prop. Treas. Reg. § 1.125-2), the term “taxable year” in § 125(i) (which does not specify that it refers, for example, to the employee’s taxable year or to the employer’s taxable year) refers to the plan year of the cafeteria plan. Similarly, the reference to “taxable year” in the effective date provision of § 125(i) refers to the plan year of the cafeteria plan. Accordingly, the $2,500 limit on health FSA salary reduction contributions applies on a plan year basis and is effective for plan years beginning after December 31, 2012. Also, the $2,500 limit will be indexed for cost-of-living adjustments for plan years beginning after December 31, 2013. See General Explanation of Tax Legislation Enacted in the 111th Congress (2011), Joint Committee on Taxation, at 317.
A § 125 cafeteria plan may offer only qualified benefits. A plan that offers a nonqualified benefit is not a § 125 cafeteria plan. Section 125(d)(1)(B); see also Prop. Treas. Reg. § 1.125-1(q). Accordingly, a cafeteria plan that fails to comply with § 125(i) for plan years beginning after December 31, 2012 is not a § 125 cafeteria plan and the value of the taxable benefits that an employee could have elected to receive under the plan during the plan year is includible in employee’s gross income, regardless of the benefit elected by the employee. See Prop. Treas. Reg. § 1.125-1(b). As explained below, the cafeteria plan must be amended to reflect the $2,500 limit, and must also comply with the $2,500 limit in operation.
Consistent with Prop. Treas. Reg. § 1.125-1(d)(2), a plan year is permitted to be changed only for a valid business purpose. If a principal purpose of changing from a calendar year to a fiscal year is to delay the application of the $2,500 limit, the change is not for a valid business purpose. If a change in the plan year does not satisfy this valid business purpose requirement, the plan year for the cafeteria plan remains the plan year that was in effect prior to the attempted change.
The $2,500 limit on salary reduction contributions to a health FSA applies on an employee-by-employee basis. Thus, $2,500 (as indexed for inflation) is the maximum salary reduction contribution each employee may make for a plan year, regardless of the number of other individuals (for example, a spouse, dependents, or adult children (see § 105(b)) whose medical expenses are reimbursable under the employee’s health FSA. Consistent with this rule, if each of two spouses is eligible to elect salary reduction contributions to an FSA, each spouse may elect to make salary reduction contributions of up to $2,500 (as indexed for inflation) to his or her health FSA, even if both participate in the same health FSA sponsored by the same employer.
All employers that are treated as a single employer under § 414(b), (c), or (m), relating to controlled groups and affiliated service groups, are treated as a single employer for purposes of the $2,500 limit. If an employee participates in multiple cafeteria plans offering health FSAs maintained by members of a controlled group or affiliated service group, the employee’s total health FSA salary reduction contributions under all of the cafeteria plans are limited to $2,500 (as indexed for inflation). Section 125(g)(4). However, an employee employed by two or more employers that are not members of the same controlled group may elect up to $2,500 (as indexed for inflation) under each employer’s health FSA.
As noted, the $2,500 limit applies only to salary reduction contributions and not to employer non-elective contributions, sometimes called flex credits. Generally, an employer may make flex credits available to an employee who is eligible to participate in the cafeteria plan, to be used (at the employee’s election) only for one or more qualified benefits. For further information on flex credits, see Prop. Treas. Reg. § 1.125-5(b). For example, if an employer contributes a $500 flex credit to each employee’s health FSA for the 2013 plan year, each employee may still elect to make salary reduction contributions of $2,500 (as indexed for inflation) to a health FSA for that plan year. However, if an employer provides flex credits that employees may elect to receive as cash or as a taxable benefit, those flex credits are treated as salary reduction contributions for purposes of § 125(i).
The statute imposes the $2,500 limit only on salary reduction contributions to a health FSA in a cafeteria plan and does not limit the amount permitted for reimbursement under other employer-provided coverage, such as employee salary reduction contributions to an FSA for dependent care assistance or adoption care assistance. The limit also does not apply to salary reduction contributions to a cafeteria plan that are used to pay an employee’s share of health coverage premiums (or the corresponding employee share under a self-insured employer-sponsored health plan) — sometimes referred to as “premium conversion” salary reduction contributions — nor does it apply to salary reduction or any other contributions to a health savings account (HSA) or to amounts made available by an employer under a health reimbursement arrangement (HRA).
If a plan provides for a grace period (which, as noted above, can be no longer than two months and 15 days) for a plan year, unused salary reduction contributions to the health FSA for the plan year that are carried over into the grace period do not count against the $2,500 limit applicable for the subsequent plan year.
If a cafeteria plan timely complies with the written plan requirement limiting health FSA salary reduction contributions as set forth in section IV, below, but one or more employees are erroneously allowed to elect a salary reduction of more than $2,500 (as indexed for inflation) for a plan year, the cafeteria plan will continue to be a § 125 cafeteria plan for that plan year if (1) the terms of the plan apply uniformly to all participants (consistent with Prop. Treas. Reg. § 1.125-1(c)(1)); (2) the error results from a reasonable mistake by the employer (or the employer’s agent) and is not due to willful neglect by the employer (or the employer’s agent); and (3) salary reduction contributions in excess of $2,500 (as indexed for inflation) are paid to the employee and reported as wages for income tax withholding and employment tax purposes on the employee’s Form W-2, Wage and Tax Statement (or Form W-2c, Corrected Wage and Tax Statement) for the employee’s taxable year in which, or with which, ends the cafeteria plan year in which the correction is made.
The relief provided in this section III with respect to erroneous excess contributions is not available for an employer if a federal tax return of the employer is under examination with respect to benefits provided under a cafeteria plan with respect to any cafeteria plan year during which the failure to comply with § 125(i) occurred. For this purpose, an employer is treated as under examination if the employer receives written notification (for example, by plan examination, information document request (IDR), or notification of proposed adjustments to a federal tax return) from the examining agent(s) specifically citing § 125(i) as an issue under consideration.
A cafeteria plan offering a health FSA must be amended to set forth the $2,500 limit (or, at the employer’s option, a lower limit specified in the plan). Cafeteria plan amendments may be effective only prospectively. See Prop. Treas. Reg. § 1.125-1(c). Notwithstanding this rule against retroactive amendments, an amendment to conform a cafeteria plan to the requirements of § 125(i) that is adopted on or before December 31, 2014, may be made effective retroactively, provided that the cafeteria plan operates in accordance with the requirements of § 125(i) (including the guidance under this notice) for plan years beginning after December 31, 2012. This amendment to the written cafeteria plan may be expressed as a maximum dollar amount or by another method of determining the maximum dollar amount of salary reduction contributions to a health FSA, but in no case may the plan permit a participant to make salary reduction contributions, for a plan year beginning after December 31, 2012, exceeding the $2,500 limit.
The rules of this notice are illustrated by the following examples. For all examples, it is assumed that the cafeteria plan otherwise satisfies all of the requirements of § 125 and the proposed regulations, and that the employer is not a member of a controlled group or affiliated service group.
Example 1. (i) Employer W offers a calendar year cafeteria plan including a health FSA. Employer W amends its written cafeteria plan by December 31, 2014, to provide that, effective for the plan year beginning on January 1, 2013, employee salary reduction contributions to a health FSA are limited to $2,500 (as indexed for inflation).
(ii)Employer W’s written cafeteria plan satisfies the requirements of § 125(i).
Example 2. (i) Employer X offers a calendar year cafeteria plan including a health FSA with a grace period of two months and 15 days that complies with Notice 2005-42 and the proposed regulations. Effective for the 2012 plan year, the written plan provides that employee salary reduction contributions for the health FSA are limited to $5,000. Effective for the 2013 plan year, the written plan provides that employee salary reduction contributions to the health FSA are limited to $2,500 (as indexed for inflation). Some employees have unused amounts from their 2012 health FSA salary reduction contributions that remain available during the grace period in the first two months and 15 days of 2013.
(ii) The availability during the grace period of amounts attributable to 2012 health FSA salary reduction contributions does not cause Employer X’s cafeteria plan to fail to satisfy the $2,500 limit.
Under the guidance provided in this notice, section 125(i) applies to plan years beginning after December 31, 2012. Indexing of the $2,500 limit applies to plan years beginning after December 31, 2013.
The Treasury Department and the IRS intend to amend the regulations under §§ 1.125-1, 1.125-2, and 1.125-5 to provide for the $2,500 limit, and taxpayers may rely on the foregoing guidance in this notice pending issuance of the amended regulations.
In light of the $2,500 limit, the Treasury Department and the IRS are considering whether, for health FSAs, the position contained in proposed regulations that is often referred to as the “use-or-lose” rule” should be modified. That rule generally prohibits any contribution or benefit under an FSA from being used in a subsequent plan year or period of coverage. See Prop. Treas. Reg. § 1.125-1, Q&A-7(b) (1984); Prop. Treas. Reg. § 1.125-2, Q&A-5 & Q&A-7 (1989); Prop. Treas. Reg. § 1.125-5(c) (2007). Thus, under this rule, unused amounts in the health FSA are “forfeited” at the end of the plan year.
The $2,500 limit, while not addressing the “use-or-lose” rule, limits the potential for using health FSAs to defer compensation and the extent to which salary reduction amounts may accumulate over time. Given the $2,500 limit, the Treasury Department and the IRS are considering whether the use-or-lose rule for health FSAs should be modified to provide a different form of administrative relief (instead of, or in addition to, the current 2 1/2 month grace period rule). Comments are requested on whether the proposed regulations should be modified to provide additional flexibility with respect to the operation of the use-or-lose rule for health FSAs and, if so, how any such flexibility might be formulated and constrained. Comments are also requested on how any such modifications would interact with the $2,500 limit.
This section VIII of this notice does not constitute guidance and may not be relied upon by taxpayers.
Comments must be submitted by August 17, 2012. Comments should include a reference to Notice 2012-40. Send submissions to CC:PA:LPD:PR (Notice 2012-40), Room 5203, Internal Revenue Service, P.O. Box 7604, Ben Franklin Station, Washington, DC 20044. Submissions may be hand delivered Monday through Friday between the hours of 8 a.m. and 4 p.m. to CC:PA:LPD:PR (Notice 2012-40), Courier’s Desk, Internal Revenue Service, 1111 Constitution Avenue, NW, Washington, DC 20044, or sent electronically, via the following e-mail address: Notice.comments@irscounsel.treas.gov. Please include “Notice 2012-40” in the subject line of any electronic communication. All material submitted will be available for public inspection and copying.
On April 15, 2010, the Department of the Treasury (Treasury Department) and the Internal Revenue Service (IRS) published Notice 2010-30, 2010-18 I.R.B. 650, which provides relief and procedures for certain taxpayers who are spouses (civilian spouses) of active duty members of the uniformed services (servicemembers). The relief and procedures were made available to civilian spouses who (A) accompany their servicemember spouses to a military duty station in American Samoa, Guam, the Northern Mariana Islands (NMI), Puerto Rico, or the U.S. Virgin Islands (USVI) (each a “U.S. territory”) and claim residence or domicile (tax residence) in one of the 50 States or the District of Columbia under the Military Spouses Residency Relief Act (MSRRA) or (B) accompany their servicemember spouses to a military duty station in one of the 50 States or the District of Columbia and claim tax residence in a U.S. territory under MSRRA. The relief and procedures set forth in Notice 2010-30 were initially available for the taxable year including November 11, 2009 (generally, this would be calendar year 2009, referred to hereinafter as 2009). On April 8, 2011, the Treasury Department and the IRS published Notice 2011-16, 2011-17 I.R.B. 720, which extended the relief and procedures announced in Notice 2010-30 to the first taxable year beginning after November 11, 2009 (generally, this would be calendar year 2010).
This notice further extends the relief set forth in Notice 2010-30 for civilian spouses described in the prior paragraph to taxable years beginning after November 11, 2010 (generally, these will be calendar year 2011 and subsequent calendar years, referred to hereinafter as 2011 and subsequent taxable years), and provides that such civilian spouses should follow the applicable procedures described in Notice 2010-30.
The extension of time to pay federal income taxes described in Part III(A)(1)(b) of Notice 2010-30 for 2009 is available to eligible civilian spouses described in Part III(A)(1)(b) of Notice 2010-30 claiming MSRRA relief with respect to individual federal income tax returns filed for 2011 and subsequent taxable years. To obtain an extension of time through October 17, 2012, to pay federal income taxes for 2011, such taxpayers should follow the procedures in Part III(A)(1)(b) of Notice 2010-30. To obtain an extension to pay federal income taxes for subsequent taxable years, such taxpayers should follow those same procedures adjusted for the appropriate filing dates in each such subsequent taxable year.
As provided in Notice 2010-30, the IRS has also determined pursuant to section 6654(e)(3)(A) of the Internal Revenue Code that, with respect to civilian spouses eligible for the extension of time to pay federal income taxes described in this notice and Part III(A)(1)(b) of Notice 2010-30, the addition to tax under section 6654(a) will not apply in the case of an underpayment of estimated tax by such civilian spouses for 2011 and subsequent taxable years due to unusual circumstances.
Civilian spouses who obtain the extension to pay federal income taxes for 2011 and subsequent taxable years provided by this notice are required to pay interest on the amount of tax from the original payment due date until the date the tax is paid. Pursuant to section 6601, interest is calculated from the prescribed payment due date determined under section 6151 without regard to any extension to pay federal income tax, including the extension to pay tax provided by this notice.
For the reasons discussed in Part III(A)(2) of Notice 2010-30, the extension to pay federal income taxes described in Part III(A)(1)(b) of Notice 2010-30 is not available to civilian spouses claiming tax residence in a State or the District of Columbia under MSRRA and filing individual federal income tax returns for 2011 and subsequent taxable years who are (A) federal employees in American Samoa, Guam, or the USVI, or (B) individuals working in Guam or the NMI to whom section 935 applies. These civilian spouses should file their individual federal income tax returns for 2011 and subsequent taxable years, and pay any taxes due, according to the procedures described in Part III(A)(2) of Notice 2010-30.
Civilian spouses who accompany their servicemember spouses to a military duty station in one of the 50 States or the District of Columbia and who claim tax residence in a U.S. territory under MSRRA should follow the procedures in Part III(B) of Notice 2010-30 with respect to their individual federal income tax returns for 2011 and subsequent taxable years.
The principal author of this notice is Jackie B. Manasterli of the Office of Associate Chief Counsel (International). For further information regarding this notice, contact Jackie B. Manasterli at (202) 435-5262 (not a toll-free call).
This notice publishes the inflation adjustment factor for the credit for carbon dioxide (CO2) sequestration under § 45Q of the Internal Revenue Code (§ 45Q credit) for calendar year 2012. The inflation adjustment factor is used to determine the amount of the credit allowable under § 45Q. The calendar year 2012 inflation-adjusted credit applies to the amount of qualified CO2 captured by a taxpayer at a qualified facility and disposed of in secure geological storage.
Section 45Q(a)(1) allows a credit of $20 per metric ton of qualified CO2 that is captured by the taxpayer at a qualified facility, disposed of by the taxpayer in secure geological storage, and not used by the taxpayer as a tertiary injectant. Section 45Q(a)(2) allows a credit of $10 per metric ton of qualified CO2 that is captured by the taxpayer at a qualified facility, used by the taxpayer as a tertiary injectant in a qualified enhanced oil or natural gas recovery project, and disposed of by the taxpayer in secure geological storage.
Section 45Q(b)(1) defines the term “qualified carbon dioxide” as CO2 captured from an industrial source that would otherwise be released into the atmosphere as industrial emission of greenhouse gas, and that is measured at the source of capture and verified at the point of disposal or injection. Qualified CO2 includes the initial deposit of captured CO2 used as a tertiary injectant but does not include CO2 that is re-captured, recycled, or otherwise re-injected as part of the enhanced oil and natural gas recovery process.
Section 45Q(c) defines the term “qualified facility” as an industrial facility that is owned by the taxpayer, where carbon capture equipment is placed in service, and where at least 500,000 metric tons of CO2 is captured during the taxable year.
Section 45Q(d)(2) provides that the Secretary, in consultation with the Administrator of the Environmental Protection Agency (EPA), the Secretary of Energy, and the Secretary of the Interior, shall establish regulations for determining adequate security measures for the geological storage of CO2 under subsection (a)(1)(B) or (a)(2)(C) such that the CO2 does not escape into the atmosphere. See section 5 of Notice 2009-83, 2009-44 I.R.B. 588, for procedures regarding secure geological storage.
Section 45Q(d)(5) allows the § 45Q credit to the person that captures and physically or contractually ensures the disposal of or the use as a tertiary injectant of the qualified CO2, except to the extent provided in regulations prescribed by the Secretary.
Section 43(b)(3)(B) defines “inflation adjustment factor” as, with respect to any calendar year, a fraction the numerator of which is the GNP implicit price deflator for the preceding calendar year and the denominator of which is the GNP implicit price deflator for 1990. For purposes of § 45Q(d)(7), with respect to 2012 calendar year, the inflation adjustment factor is a fraction the numerator of which is the GNP implicit price deflator for 2011 (113.347) and the denominator of which is the GNP implicit price deflator for 2008 (108.589).
Section 45Q(e) provides that the § 45Q credit will apply with respect to qualified CO2 before the end of the calendar year in which the Secretary, in consultation with the EPA, certifies that 75,000,000 metric tons of qualified CO2 have been taken into account in accordance with § 45Q(a).
The inflation adjustment factor for calendar year 2012 is 1.0438. The 45Q credit for calendar year 2012 is $20.88 per metric ton of qualified CO2 under § 45Q(a)(1) and $10.44 per metric ton of qualified CO2 under § 45Q(a)(2).
The principal author of this notice is Jennifer C. Bernardini of the Office of Associate Chief Counsel (Passthroughs & Special Industries). For further information regarding this notice, contact Ms. Bernardini at (202) 622-3110 (not a toll-free call).
The composite corporate bond rate for May 2012 is 4.39 percent. Pursuant to Notice 2004-34, the Service has determined this rate as the average of the monthly yields for the included corporate bond indices for that month.
The transitional rule of § 430(h)(2)(G) does not apply to plan years beginning after December 31, 2009. Therefore, for a plan year beginning after 2009 with a lookback month to June 2012, the funding segment rates are the three 24-month average corporate bond segment rates applicable for June 2012, listed above without blending for any transitional period.
The rate of interest on 30-year Treasury securities for May 2012 is 2.93 percent. The Service has determined this rate as the average of the yield on the 30-year Treasury bond maturing in February 2042 determined each day through May 9, 2012, and the yield on the 30-year Treasury bond maturing in May 2042 determined each day for the balance of the month.
The Internal Revenue Service (Service) is providing administrative guidelines to examiners concerning Rev. Rul. 2012-18, published in the 2012-26 Internal Revenue Bulletin. The Service is aware that some businesses may have to change automated or manual reporting systems in order to comply with the proper treatment of service charges as specified in Q&A 1 of Rev. Rul. 2012-18.
In a future announcement, the Service will also solicit public comments on proposed changes to the Service’s existing voluntary tip compliance agreements. Specifically, the Service is considering significant changes to the Tip Reporting Alternative Commitment (TRAC) program and other variations of TRAC agreements. Versions of the existing voluntary tip compliance agreements are available on the IRS website at Market Segment Understandings (MSU) http://www.irs.gov/businesses/small/article/0,,id=98944,00.html. They may also be obtained from the IRS office listed above. The Service is interested in updating its suite of voluntary tip compliance agreements to place a greater emphasis on computations derived from Point of Sale systems and the use of electronic payment settlement methods, such as credit and debit cards. While employee education will remain a focus of the Service’s efforts, these new voluntary tip compliance agreements will increase the participants’ reliance on internal control systems to improve employee tip reporting compliance.
Following is a copy of the interim guidance memorandum that examiners will use until procedures are published in the Internal Revenue Manual, after receiving and considering comments submitted in response to this announcement.
 Among the topics covered in this revenue ruling are reporting and depositing of FICA taxes on tips, Section 3121(q) Notice and Demand issues, and the section 45B credit.

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