Monthly Archives: December 2013
Friday, December 27, 2013

Since the Supreme Court ruled section 3 of DOMA unconstitutional in United States v. Windsor, benefits practitioners have been eagerly awaiting IRS guidance as to how the decision impacts employee benefits. On December 16, 2013, the IRS released Notice 2014-1, to provide some information as to how Federal tax recognition of same-sex spouses affects cafeteria plans, including health and dependent care flexible spending accounts (“FSAs”) and health savings accounts (“HSAs”). Though there were no surprises in the Notice, it may give comfort to employers who allowed employees with same-sex spouses to change elections mid-2013 as a result of Windsor. However, requirements as to the timing of some cafeteria plan amendments is still left unsettled.

Election Changes

Under the Code Section 125 rules, an employee may change cafeteria plan elections mid-year and make new elections only under certain circumstances and as permitted by the plan. The Notice provides that a cafeteria plan may treat a participant who was married to a same-sex spouse as of June 26, 2013 (the date of the Windsor decision) as if the participant experienced a change in legal marital status, and accept election changes due to that change in status, at any time during the plan year that includes June 26 or December 16, 2013. For calendar-year cafeteria plans, this is of little help going forward, as there are few days left in the plan year anyway, although the Notice goes on to say that if a plan allowed an election change on this theory from June 26 to December 31, 2013 in the absence of IRS guidance, the IRS will consider it as permissible.

Cost of Group Health Coverage for Same-Sex Spouses

The amount that a participant pays for group health coverage for his or her spouse is excluded from the participant’s gross income and is not subject to Federal income or employment taxes, but what if a participant has been paying for the cost of coverage for his or her same-sex spouse on an after-tax basis? The Notice provides that if an employer knows or is notified by the end of a cafeteria plan year that includes December 16, 2013, that a participant is married to a same-sex spouse and is paying for that coverage on an after-tax basis, it must permit the participant to pay for the cost of coverage for that spouse on a pre-tax basis no later than the later of (1) the date an employer would be required to implement a new income tax withholding election due to a change in marital status of an employee, or (2) a reasonable time after December 16, 2013. A participant may choose to pay for the same-sex spouse’s group health coverage on a pre-tax basis through the end of the current cafeteria plan year, or continue paying for these benefits on an after-tax basis, and may seek a refund of Federal income or employment taxes paid on the amount of that spousal coverage for any prior open tax years. The participant may also exclude these amounts from gross income when he or she files an income tax return.

FSA Reimbursements

Calendar-year FSAs may permit a participant’s account to reimburse covered expenses incurred by a same-sex spouse as early as January 1, 2013, assuming the participant was married to the same-sex spouse at the time the expense was incurred. This guidance applies to health, dependent care and adoption assistance FSAs. This may be welcome news to participants who need to zero out FSAs by year-end and have unreimbursed eligible expenses incurred by a same-sex spouse.

Non-calendar year FSAs may permit such reimbursement for expenses incurred as the beginning of the plan year that includes June 26, 2013, assuming the participant was married to the same-sex spouse at the time the expense was incurred.

Interestingly, the IRS uses permissive language here (may permit rather than must permit such reimbursement), which is consistent with the fact that neither ERISA nor the tax code requires coverage for spouses in welfare plans. That said, in choosing to exclude same-sex spouses from coverage, employers should consider the impact of potential Title VII claims, as well as potential state law discrimination claims (particularly for dependent care and adoption assistance FSAs, where ERISA preemption does not apply).

Contribution Limits

Not surprisingly, the HSA contribution limit for married couples (for 2013, $6,450) applies to same-sex married couples as it does for opposite-sex couples, starting with the 2013 taxable year. Same-sex couples who go over the limit will need to get excess contributions out of one or both HSAs by the due date of the applicable taxpayer’s 2013 income tax return. Similarly, the contribution limit for dependent care FSAs (currently $5,000 for married couples) applies to same-sex married couples beginning with 2013. To the extent that remaining contributions cannot be reduced before the end of the tax year to avoid exceeding the limit, any excess contributions will be includable in the spouses’ gross income for the year.


If a cafeteria plan already permitted a change in election upon a change in legal marital status, the Notice provides that the plan will generally not be required to be amended to permit such change with respect to a same-sex marriage. Although not stated in the Notice, presumably if the language of the cafeteria plan restricted the definition of spouse for such purposes as an opposite-sex spouse, the plan should be amended, although it is not known by when. The Notice also provides that if a plan sponsor choses to permit election changes that were not previously provided for the in the plan document, it must amend no later than the last day of the first plan year beginning on or after December 16, 2013 (December 31, 2014 for calendar-year plans). This amendment should be retroactive, even though generally retroactive amendments to cafeteria plans are not allowed. Perhaps this amendment deadline would also apply to amending the definition of same-sex spouse or marriage in cafeteria plans that define marriage in relation to DOMA, although the IRS does not say.

Thursday, December 26, 2013

Both the Internal Revenue Service (IRS) and the Department of Labor (DOL) are intent on making certain that retirement plans focus on best practices and good plan governance.  The expectation of these agencies is that the interests of participants will be better protected if plans operate at a high level.  Of course, having good plan governance and operating with best practices also limits the liability of plan fiduciaries, so they have an interest in good plan governance as well.

The DOL has been suggesting with some frequency that plans should engage in fiduciary training.  At this time, there is no legal mandate for fiduciary training.  Many plan fiduciaries are plan sponsor owners and/or employees.  These people, meaning well, have typically not been educated about the complex fiduciary duty rules of ERISA.  Plan administrative committees should make it part of their usual meeting routine to have periodic education and updating about their fiduciary duties.  And, in small businesses where we frequently see a business owner or other employee of the plan sponsor serve as plan trustee (a situation we try to dissuade sponsors from allowing), it is extremely important for the trustee to understand his or her duties under ERISA.   Fiduciaries need to appreciate that ERISA liability is personal.

The IRS has been focusing on internal controls for qualified plans to help them maintain their tax qualification.  It believes that a system of good internal controls will benefit plan operation enormously.  (As discussed here and here.)  The IRS is also about to issue its self-audit tool, probably in January 2014.  The self-audit tool, Questionnaire Self Audit Tool (QSAT), is intended to assist plan fiduciaries with internal controls over plan operation  Because plans vary in their operations, the QSAT will be a helpful tool for identifying potential problems, but plan sponsors and administrators should not view it as a substitute for a thorough understanding of plan operations.  Utilizing the QSAT would be evidence of a plan sponsor or administrator exercising its fiduciary diligence and therefore fiduciaries should watch for its release.

Here are 25 additional suggestions (we actually have several dozen) to improve your plan governance as we head into next year:

1.         Identify your plan fiduciaries, both internal and external, and make certain their roles are known and understood.

2.         Review administrative service agreements to make certain they are proper and are being followed.

3.         Identify any delegation of fiduciary duties, make certain that the delegations are in writing (like corporate charters or board resolutions) and are being followed correctly.

4.         Be certain that the fiduciaries have maintained required oversight of those to whom there has been a delegation and have procedures in place to assure that oversight occurs.  While not explicitly required, some written evidence of these procedures is desirable.  Of course, if you put it in writing, you should also make sure that writing is being followed.

5.         Review efforts of all fiduciaries to make certain that the ERISA prudence requirement is being met by them.

6.         Make certain that the plan terms are being following in operation.

7.         Confirm that all required plan amendments have been made timely, and, if not, that correction is undertaken.

8.         Review all plan policies and procedures to make certain they are accurate and complete.

9.         Check the plan forms for accuracy, completeness, and consistency with the applicable plan documents and be certain that there is a process in place to do so periodically.

10.       Confirm that disclosures (whether written or electronic) comply with DOL and/or IRS form, timing, and delivery requirements.

11.       Hold regular administrative committee meetings.

12.       Memorialize all administrative committee actions and rationale.

13.       Engage the services of an independent investment advisor.

14.       Have a document retention system and recordkeeping policy in place.

15.       Review plan transactions to confirm that there have been no prohibited transactions.

16.       Verify that there have been no self-dealing transactions.

17.       Plan administrators should confirm that they meet ERISA requirements for prudence and process with effective due diligence procedures in place when selecting plan service providers, plan investment options, and in exercising other matters involving their discretion.

18.       Confirm that the claims review procedures are current and followed.

19.       Confirm that plan funding is timely (especially the funding of elective deferrals and participant loan payments).

20.       To the extent applicable, make certain that plan documents allow for payment of plan expenses and that expenses paid from the plan are proper plan expenses and not settlor expenses.

21.         Confirm that proper fee disclosures have been received and reviewed and that the responsible fiduciaries understand them.

22.       If the plan is intended to comply with 404(c), confirm that it meets the requirements.

23.       Verify that the ERISA bond is in place and in the appropriate amount.

24.       Confirm that there are no conflicts of interest with any service providers.

25.       Monitor the 401(k) investment menu regularly.

Friday, December 20, 2013

As the tax year end approaches, careful planning for year-end bonus accruals presents an opportunity to accelerate your deduction – don’t accidentally cause deferral. Recent guidance from the Internal Revenue Service provides a roadmap to the latest thinking when claiming deductions for bonus pool accruals. The key take away from Field Attorney Advice Memorandum LAFA 20134301F: scrub compensation committee resolutions approving bonus amounts to remove any possible post-year end discretion to reduce the full bonus pool amount.

This client alert (drafted by Bryan Cave lawyers Chris Welsch, Dan White, and Sarah Sise) discusses the guidance.

Written by and in: General
Thursday, December 19, 2013

On November 21, 2013, the U.S. Government Accountability Office (GAO) issued a report entitled “Clarity of Required Reports and Disclosures Could Be Improved,”addressing the resources currently allocated by Congress to the oversight of private sector pension plans under ERISA by the Department of Labor (DOL), the Internal Revenue Service (IRS) and Pension Benefit Guaranty Corporation (PBGC).  The report was commissioned to “look at how useful all the pension reporting and disclosure requirements are to sponsors, participants and government officials and determine whether there are ways to improve the system.”  As plan sponsors know, participants are inundated with a deluge of disclosure requirements and there are multiple reporting requirements to various government agencies, both of which the GAO report essentially confirms.

Some of the more interesting observations of the GAO include:

  • The GAO identified 70 different reports and 60 different disclosures arising from provisions of ERISA and the Internal Revenue Code.
  • The GAO evaluated the DOL and other ERISA agencies online resources and found them to be “not clear, comprehensive or up-to-date.”  Additionally, the GAO noted that the DOL’s guide listing required reports and disclosures had not been updated since October 2008 and did not include many of the IRS reports and disclosures and several of the reports and disclosures under the DOL’s and PBGC’s purview.  The GAO also stated that neither the PBGC or IRS sites provide comprehensive information regarding reporting and disclosure requirements and noted that the PBGC site does not provide a central location for reporting and disclosure requirements.
  • The GAO found poor management of data, spread across the three agencies, which it thought resulted in the potential for misleading information included in notices provided to some retirees.  In particular, GAO pointed to Form 8955-SSA, the registration statement identifying separated participants with deferred vested benefits.  GAO stated that the vested benefit data provided in such forms and notice was “not managed in a way that ensures their accuracy.”  The data on the Form 8955-SSA is provided by plan sponsors to the IRS, which merely passes the form on to the Social Security Administration (the “SSA”), which in turn prepares notices for retirees without any verification of the data.  The SSA also provides the DOL as the point of contact in such notices.
  • The GAO tested ten model notices from the agencies against federal plain language guidelines and found that several of the model notices failed to meet such guidelines.  Failures included not explaining technical terrms used in the notices and cross referencing other sources of information to understand the notices, not explaining what a participant is supposed to do with the information in the notice, and not providing language about assistance available to non-English speakers.  Additionally, based on a “automated grade-level readability test,” the GAO found that some of the model notices ranged from requiring a tenth-grade reading level to a college senior reading level (including the form blackout notice and ERISA rights statement).

The GAO ultimately emphasized the need to enhance plan sponsor compliance and the efficiency and effectiveness of reports and disclosures in light of the “increasingly complex world of private sector pension plans.”  As the current system leaves the DOL with the responsibility for retaining pension information, despite splitting the responsibility for collecting such information between the IRS and the SSA,  the GAO suggested that Congress should shift responsibility to the DOL (perhaps in partnership with the PBGC) as central hub for collecting and managing private pension plan information.  Additionally, the GAO suggested that the agencies collaborate to: (1) create (and regularly updating) a well-organized and complete guide for plan sponsors regarding their required reporting and disclosure requirements; (2) define criteria complying with the readability provisions in ERISA and the Internal Revenue Code, and apply the criteria to agency-generated model notices; and (3) direct plan sponsors to post to any intranet website maintained by the employer a copy of the most current Summary Plan Description and any Summaries of Material Modifications issued subsequent to such Summary Plan Description.

The responses to the report provided by the agencies indicate their willingness to consider collaborating on the points above. However, with limited government resources and, as the GAO notes, an increasingly complex world of benefits, it seems unlikely that such collaboration will be able to happen in the near future.  Until then, plan sponsors should continue to do their best to communicate their benefits in a meaningful and understandable fashion, not just because it is the law, but also to help their employees understand, and value, the benefits they’re receiving.

Thursday, December 19, 2013

On December 16th, the Supreme Court issued its opinion in Heimeshoff v. Hartford Life & Accident Ins. Co. – a case involving the tension between: (i) the contractual limitations period in Wal-Mart’s group long-term disability policy, and (ii) the requirement that claimants exhaust their administrative remedies before filing suit for benefits under ERISA.  In an unanimous decision, the Court yet again favored the interests of enforcement of reasonable plan terms over competing policy interests.  A copy of Heimeshoff opinion is available here.

The Facts in Brief.  Ms. Heimeshoff submitted a claim under Wal-Mart’s long-term disability plan, claiming that she suffered from “extreme pain, significant pain, and difficulty in concentration.”  Hartford Life & Accident Insurance, the plan’s claims administrator, denied the claim.  Heimeshoff administratively appealed the claim denial, and Hartford issued its final claim denial on November 26, 2007.  Just shy of three years later, on November 18, 2010, Heimeshoff filed suit claiming benefits under ERISA.

Hartford argued that Heimeshoff’s claim was barred by the three-year limitations period prescribed in Wal-Mart’s LTD plan, which, under its terms, commenced at the “time written proof of loss” is required to be submitted.  (The latest time for Heimeshoff to submit her proof of loss was in September 2007, in conjunction her administrative appeal.)  Heimeshoff argued that commencing the limitations period at the time written proof is loss must be furnished denied her the full benefit of the three-year limitations period, and that enforcing such a provision could require some claimants to institute litigation before they have exhausted the administrative claims procedure.  The lower courts upheld Hartford’s claim denial and enforced the limitations period as written in the plan.

The Supreme Court Decision.  In delightfully compact logic, the high Court concluded that since it is well established that parties can contract around a default statute of limitations in ERISA plans, they can likewise provide when that limitations period commences.  It reinforced that courts must give effect to limitations provisions in ERISA plans unless the limitations period is unreasonably short (which was not even raised as an issue here) or a “controlling statute” overrides the limitations period.  Here, the Court rejected Heimeshoff’s argument that the exhaustion requirement implicit in ERISA § 503 displaced the limitations period.  In doing so, it dismissed the argument that plan administrators might be encouraged to delay claims in order to start the “limitations clock” well before the completion of the administrative claims process since ERISA and the DOL regulations already require plan administrators to respond to claims in a prompt fashion.  Furthermore, the Heimeshoff Court noted, if plan administrators acted in less than good faith in the administration of claims, then lower courts have a wide spectrum of equitable powers to remedy the situation.

Bryan Cave’s PerspectiveHeimeshoff is the latest in a growing line of cases in which the Supreme Court has recognized the supremacy of the plan document over competing policy interests.  See e.g., U.S. Airways, Inc. v. McCutchen, 133 S. Ct. 1537 (2013)(traditional equitable considerations in ERISA § 502(a)(3) do not override clear and reasonable plan language) and Kennedy v. Plan Administrator for DuPont Sav. and Investment Plan, 555 U.S. 285 (2009)(upholding payment of benefits to ex-spouse under unrevoked beneficiary designation despite waiver of benefits in non-QDRO divorce decree).  That the plan document is afforded near-sacrosanct status actually favors plan administrators, even if it leads to difficult results on occasion.  Following this guiding principle, plan administrators can expressly enforce the reasonable plan terms as written, rather than attempt to make decisions based on policy or equitable considerations.

Wednesday, December 18, 2013

On December 11th, the IRS issued new guidance (Notice 2013-74) regarding rollovers of a distribution from an individual’s non-designated Roth accounts within a retirement plan to his or her designated Roth account in the same plan (often referred to as “In-Plan Roth Conversions” or “In-Plan Roth Rollovers”). Such In-Plan Roth Rollovers may be tax-free to the applicable participant in a 401(k), 403(b), or 457(b) governmental plan if certain requirements are met under Code Section 402A.

The Notice clarifies a number of points which plan sponsors should be aware of when adding and/or administering an In-Plan Roth Rollover feature, including the types of contributions which may be rolled over and how such amounts must be treated by the applicable plan once rolled over. The Notice also provides for certain extensions which may permit 401(k) plan sponsors to amend their plan documents to incorporate In-Plan Roth Rollovers as late as December 31, 2014.

For a more in-depth discussion of the new guidance in the Notice, check out our recent client alert here.

Tuesday, December 17, 2013
  • On Friday, the Supreme Court granted certiorari in Dudenheofer v. Fifth Third Bankcorp. (U.S., No. 12-751, cert. granted 12/13/13).  This suit was initially filed by participants in Fifth Third Bancorp’s profit sharing plan in a typical “stock drop” case.  Plaintiffs alleged that plan fiduciaries continued to invest in and hold Fifth Third stock despite its decline in value in breach of their fiduciary duties, including their duty to prudently and loyally manage the plan’s investment in company securities.
  • Both the ESOP portion of Fifth Third’s 401(k) plan and its company matching account were required to invest “primarily” in Fifth Third stock, although participants could then redirect any matching contributions into other investment options outside of such stock.  Plan fiduciaries also incorporated by reference Fifth Third’s SEC filings into the summary plan description.  Plaintiffs claimed that such filings contained misstatements and omissions in breach of ERISA’s duty of loyalty.
  • The district court dismissed Plaintiffs’ claims, but the Sixth Circuit reversed.  In its reversal, the Sixth Circuit ruled that:
    • Since  the terms of the plan did not require the ESOP portion of the plan to invest solely in Fifth Third stock and did not limit the ability of the Plan fiduciaries to remove the ESOP or divest its assets, the Moench presumption (i.e., the presumption that a fiduciary’s decision to remain invested in employer stock is reasonable) was inapplicable at the motion to dismiss stage; and
    • Since the fiduciaries “expressly incorporated by reference specifically named SEC filings into the Plan’s summary plan description”, a document ERISA requires to be sent to plan participants to provide specified information about the plan, the action was undertaken in their role as plan administrators.  The incorporation of specific SEC filings was therefore an exercise of discretion on the fiduciaries’ part and actionable under ERISA.
  • The defendants presented two questions for consideration by the Supreme Court:
    1. Whether the Sixth Circuit erred by holding that Respondents were not required to plausibly allege in their complaint that the fiduciaries of an ESOP abused their discretion by remaining invested in employer stock, in order to overcome the Moench presumption (i.e., the presumption that their decision to invest in employer stock was reasonable, as required by ERISA).
    2. Whether the Sixth Circuit erred by refusing to follow precedent of this Court in holding that filings with the SEC become actionable ERISA fiduciary communications merely by virtue of their incorporation by reference into plan documents.
  • The Supreme Court granted certiorari on question 1 only.  While the Office of the Solicitor General urged the Supreme Court to reformulate the first question to consider whether the Moench presumption of prudence should ever apply in employer stock cases (and further advocated for striking down such a presumption), the Supreme Court declined to do so, opting instead to accept the more limited question as presented by Fifth Third.


Monday, December 16, 2013

Qualified Plans

  • If your plans are filed in “Cycle C” for determinations letters (i.e., plan sponsor’s EIN ends in 3 or 8), address items needed for the IRS filing before the end of the year. The filing deadline is January 31, 2014, but notices to “interested parties” must be distributed no later than 10 days before the filing. Set that filing date and prepare the plan restatement before the ball drops.
  • If your company did not timely adopt a written 403(b) plan document, you may qualify for a reduced compliance fee under the IRS’ correction program, but only if the filing is made before the ball drops.
  • Most defined benefit plans have been amended to incorporate the benefit accrual and distribution restrictions that apply if the plan’s funding drops below certain thresholds. These Code Section 436 rules must be added to your defined benefit plan by written amendment before the ball drops if you sponsor a calendar year plan.
  • More detailed information on the above items can be found here.
  • Have your payroll and benefit administration systems been updated to reflect the new qualified plan limits for 2014? The elective deferral pre-tax/Roth limit remains unchanged at $17,500. The limit on compensation taken into account for purposes of calculating maximum contributions and benefits will go from $255,000 to $260,000. The Social Security taxable wage base will go from $113,700 to $117,000.

The Defense of Marriage Act (“DOMA”) – Repeal of Section 3

  • Qualified retirement plans, 403(b) plans and 457 plans should be administered by treating a same sex spouse as a spouse for purposes of determining rights and benefits under the plan. An individual is a same sex spouse to a participant if the individual and participant have a valid marriage under the laws of the state where the marriage occurred. While amendments to the plans are not required before the ball drops, a review of beneficiary forms and other plan administration documents and processes is recommended to ensure compliance with these new rules. We expect additional guidance from the Internal Revenue Service and the Department of Labor before 2014, but will likely have well into the new year to adopt plan amendments.
  • Welfare benefit plans should be reviewed to ensure that the definitions of spouse are consistent with the company’s intent regarding coverage of same sex spouses and, for insured plans, any state laws. Enrollment forms, summary plan descriptions and other plan administration materials should be reviewed and updated as soon as possible.
  • Same sex spouses are now dependents under federal law for purposes of determining the taxability of employer-provided health benefits and the ability to pay for health coverage on a pre-tax basis. Before the ball drops, payroll systems should be updated to reflect this change and make any required corrections for 2013. More information on this topic can be found here.

Executive Compensation

  • Under Code Section 409A rules, compensation deferral elections for amounts otherwise payable in 2014 must be documented and irrevocable before the ball drops. This deadline is not flexible!
  • Some employers utilize a rule for administrative convenience that permits income and employment tax withholding on certain items of compensation to be made at the end of the year (i.e., imputed income on after-tax long-term disability premiums). Employers should ensure that all payroll deductions for taxable compensation for the year are taken into consideration before the ball drops.

Group Health Plan Amendments Due to Health Care Reform

  • Most stand-alone Health Reimbursement Accounts (“HRAs”) are no longer permitted. You may need to amend your HRA before the ball drops to integrate it with your major medical plan and to reflect that participants will be provided an opportunity to permanently opt out of the HRA and waive future reimbursements, as described here.
  • Effective for plan years beginning on or after January 1, 2014, group health plans will become subject to several new Health Care Reform mandates. Before the ball drops, your group health plan may require amendments due to the following:
    • Plans may not establish annual dollar limits on essential health benefits for any participant or beneficiary.
    • Plans may not impose preexisting condition exclusions (but still need to send HIPAA creditable coverage notices to terminating participants through 2014).
    • Plans will be prohibited from applying a waiting period (i.e., the period that must pass before coverage for an employee or dependent who is otherwise eligible to enroll under the terms of the plan can become effective) which exceeds 90 days.
    • Non-grandfathered plans may not deny a participant who is eligible to participate in an “approved clinical trial” participation in that clinical trial, or deny or limit “routine patient costs” for items and services furnished in connection with participation in such a trial.
    • Non-grandfathered plans must limit out-of-pocket maximums to no more than $6,350 for self-only coverage and $12,700 for family coverage.
    • Click here for a complete year-end checklist for group health plans.
Tuesday, December 10, 2013

In its year-end sprint to release guidance, the IRS recently issued final regulations (TD 9645) implementing the “Additional Medicare Tax” as added by the Affordable Care Act. The final regulations come one year after the proposed rules and the receipt of only a handful of comments by the IRS.

The Additional Medicare Tax, which became effective in 2013, is an additional 0.9% tax on wages, compensation, and self-employment income over certain thresholds. The regulations detail, among other things, how to withhold the Additional Medicare Tax from the wages and compensation of certain individuals and how to correct an underpayment or overpayment of the tax.


The Additional Medicare Tax is triggered when an individual’s wages, compensation, or self-employment income (together with that of his or her spouse, if filing a joint return) exceed the following threshold amounts:

  • Filing Status – Threshold Amount
  • Married filing jointly – $250,000
  • Married filing separate – $125,000
  • Single – $200,000
  • Head of household (with qualifying person) – $200,000
  • Qualifying widow(er) with dependent child – $200,000

An employer must withhold the Additional Medicare Tax from wages it pays to an individual in excess of $200,000 in a single calendar year, regardless of (1) the individual’s filing status or (2) wages paid by another employer. While an individual may owe more or less than the amount withheld by the employer, depending on his/her individual’s filing status, as well as his/her wages, compensation, and self-employment income (and those of his/her spouse), the employer cannot modify its Additional Medicare Tax withholding. However, in the case when an individual expects that they will owe more than the amount withheld by their employer, the individual may have their employer withhold an additional amount of income tax withholding on his/her Form W-4. This may be appropriate when, for example, a married person who files a joint return and his/her spouse earn in excess of $250,000 in annual income jointly, but neither spouse alone earns compensation in excess of $200,000 (so neither spouse’s employers is required to withhold Additional Medicare Tax).


In order to correct an overpayment of income tax or Additional Medicare Tax, an employer may make an interest-free adjustment on the appropriate corrected return, but only if the employer repays or reimburses the employee before the end of the calendar year in which the compensation was paid. In the same vein, in the event of an underpayment of income tax or Additional Medicare Tax, an employer may make an interest-free adjustment on the appropriate corrected return, but only to the extent the error is discovered within the calendar year in which the compensation was paid.
For more information, check out the IRS’s FAQs.