On September 27, 2010, President Obama signed into law the Small Business Jobs Act of 2010 (the "Act"). The Act, among other things, is intended to strengthen loan programs administered by the Small Business Administration and provide tax relief to small business owners. The Act also includes certain benefit-related provisions regarding Roth accounts within retirement plans, taxation of employer-provided cell phones and health insurance tax deductions for self-employment tax purposes.
Retirement Plan Changes
The Act contains two provisions related to Roth after-tax accounts within retirement plans. Plans such as 401(k) and 403(b) plans already can include provisions that allow participants to make elective deferrals to the plan in the form of "Roth after-tax" contributions. The Act now provides that governmental 457(b) plans may allow Roth after-tax contributions for tax years beginning after 2010. In addition, the Act provides that employers can amend 401(k), 403(b) and governmental 457(b) plans to allow certain otherwise distributable pre-tax amounts to be converted to Roth after-tax amounts within the plan, subject to certain requirements. (Before this change, eligible participants could only accomplish a Roth conversion by taking a distribution of their plan assets and rolling them over to a Roth IRA.) Only amounts that are distributable (typically due to termination of employment or meeting requirements for an in-service distribution) as an eligible rollover distribution may be converted. Additionally, a plan can allow internal Roth conversions only if the plan otherwise permits Roth after-tax contributions. Since Roth accounts will not be permitted in governmental 457(b) plans until 2011, the new conversion provisions in the Act will only apply to 401(k) and 403(b) plans for 2010.
Plan sponsors who wish to allow Roth conversions within their plans should consult with their retirement plan providers and may need to act quickly if they want to implement changes for 2010.
Employer-Provided Cell Phones
The Act also removes cell phones from the definition of "listed property" under Section 280F(d)(4) of the Internal Revenue Code, effective for tax years beginning after December 31, 2009. This change eliminates the heightened substantiation requirements for employees to avoid taxation related to employer-provided cell phones used for business purposes and the special depreciation rules for employers with respect to such phones. However, this change does not eliminate the recordkeeping required to prove de minimis personal use of the cell phone. Therefore, employers must continue to maintain records to substantiate that employer-provided cell phones are used for business purposes, not personal use.
Health Insurance Deductions for Self-Employment Taxes
The Act also allows self-employed individuals who deduct the cost of health insurance for themselves and their dependents to take the full deduction into account in calculating net earnings from self-employment for purposes of self-employment taxes, but only for 2010 tax returns. Generally, the deduction can be taken for income tax purposes, but the full deduction cannot be applied for purposes of determining self-employment income subject to self-employment taxes. The change allowing the full deduction to be taken into account for self-employment taxes only applies for the self-employed individual's tax year beginning after December 31, 2009 but before January 1, 2011.