By Martin Simon, JD, Senior Legal Editor
IRS has issued proposed regulation on the Additional Medicare Tax (AMT) provision of the Affordable Care Act (ACA). The proposed regulations provide guidance for employers and individuals relating to the implementation of AMT, including the requirement to withhold AMT on certain wages and compensation, the requirement to file a return reporting AMT, the employer process for adjusting underpayments and overpayments of AMT, and the employer and employee processes for filing a claim for refund of AMT.

Background of AMT

The ACA added IRC Sec. 3101(b)(2) which increases the employee portion of Medicare tax for wages received in any taxable year beginning after December 31, 2012, by an additional 0.9 percent of Federal Insurance Contribution Act (FICA) wages which are in excess of certain threshold amounts. FICA wages are the wages paid that are subject to Social Security and Medicare taxes.

AMT differs from Medicare tax in that AMT is not imposed until wages exceed a threshold amount, and the threshold amount for application of the tax is based on the filing status of the individual. Under IRC Sec. 3101(b)(2), the threshold amount is $250,000 in the case of a joint return, $125,000 in the case of a married taxpayer filing a separate return, and $200,000 in the case of a head of household or a single filer. AMT also differs from Medicare Tax in that there is no employer portion to correspond to the amount owed by the employee.

IRC Sec. 3102(f)(1) provides that an employer’s obligation to withhold AMT applies only to the extent that the wages the employee receives from the employer are in excess of $200,000 in a calendar year. Section 3102(f)(1) further provides that in satisfying its obligation to withhold AMT, the employer may disregard the amount of wages received by the employee’s spouse.

Calculating wages for purposes of withholding AMT is no different than calculating wages for FICA generally. IRC Sec. 3102(f)(2) specifies that to the extent AMT is not withheld by the employer, the employee must pay the tax. This is consistent with the general FICA rule in IRS Reg. Sec. 31.3102-1(d), which provides that the employee is liable for the employee portion of FICA tax until collected by the employer.

Under IRC Sec. 3102(f)(3, if an employer fails to withhold AMT and the tax is subsequently paid by the employee, the IRS will not collect the tax from the employer. The employer, however, would remain subject to any applicable penalties or additions to tax for failure to withhold AMT as required. This is similar to IRC Sec. 3402(d), which abates the employer’s liability for income tax withholding when the employee has paid the income tax.

Explanation of the proposed regulation provisions

The proposed regulations provide rules for the withholding, computation, reporting, and payment of AMT on wages. The proposed regulations also provide rules for when and how employers may make an interest-free adjustment to correct an overpayment or an underpayment of AMT and how employers and employees may claim refunds for overpayments of AMT.

These procedures for interest-free adjustments and claims for refund track the existing rules that apply to income tax withholding rather than the rules that apply to FICA tax. The regulations take this approach because AMT, like income tax withholding, does not include an employer portion, and the ultimate liability is reconciled on the individual employee’s income tax return.

Employer’s obligation to withhold AMT. The proposed regulations provide that an employer must withhold AMT from an employee’s wages only to the extent that the employee receives wages from the employer in excess of $200,000 in a calendar year. In determining whether wages exceed $200,000, an employer does not take into account the employee’s filing status or other wages or compensation which may impact the employee’s liability for the tax.

An employee may not request that the employer deduct and withhold AMT on wages of $200,000 or less. However, an employee who anticipates liability for AMT may request that the employer deduct and withhold an additional amount of income tax withholding on Form W-4. This additional withholding can apply against taxes shown on Form 1040, including any AMT liability.

For example, an employee might request that the employer deduct and withhold an additional amount on wages that are not in excess of $200,000 if, for example, the employee is married and files a joint return, and anticipates liability for AMT because the combined wages of the employee and his or her spouse will exceed $250,000.

The proposed regulations provide that to the extent AMT is not withheld by the employer, the employee is liable for the tax. The proposed regulations also provide that the IRS will not collect from an employer the amount of AMT it failed to withhold from wages paid to an employee if the employee subsequently pays the AMT. However, the proposed regulations also specify that the employer would remain subject to any applicable penalties or additions to tax for failure to withhold AMT as required.

Employee’s obligation to report and pay AMT. The proposed regulations provide that an employee is liable for AMT on wages or compensation to the extent that the tax is not withheld by the employee’s employer. This is consistent with the general rule for FICA purposes that provides that the employee is liable for the tax until collected by the employer. Under the proposed regulations, an individual must report AMT on Form 1040. An individual will claim credit for any withheld AMT on Form 1040 and pay any such tax due that was not previously paid through withholding or estimated tax.

Interest-free adjustments of AMT. The proposed regulations provide that adjustments of underpayments of AMT may be made only if the error is ascertained in the same year the wages or compensation was paid, unless: (1) the underpayment is attributable to an administrative error, (2) IRC. Sec. 3509 applies to determine the amount of the underpayment, due to the employer’s failure to treat the individual as an employee, or (3) the adjustment is the result of an IRS examination.

Similarly, an adjustment of overpaid AMT may only be made if the employer ascertains the error in the year the wages or compensation was paid and repays or reimburses the employee the amount of the overcollection prior to the end of the calendar year. The requirement to repay or reimburse does not apply to the extent that, after reasonable efforts, the employer cannot locate the employee. However, if an employer has not repaid or reimbursed the amount of the overcollection to the employee, an adjustment cannot be made.

Claims for refund of AMT. The proposed regulations provide a process for employers and employees to claim refunds of overpaid AMT. Under the proposed regulations, employers may claim refunds of overpaid AMT only if the employer did not deduct or withhold the overpaid AMT from the employee’s wages or compensation. For employees, the proposed regulations eliminate the requirements that the employee first seek a refund from the employer and provide a statement in support of the employee’s claim.

In addition, the proposed regulations direct the employee to claim the refund or credit of overpaid AMT by taking the overpayment into account in claiming a credit against, or refund of, tax on his or her individual tax return for the year in which the overpayment was made, or for a taxable year for which a tax return has been filed, by filing an amended return. This process is in lieu of filing a claim for refund for overpaid AMT on Form 843, "Claim for Refund and Request for Abatement." Employees may only claim a refund of AMT if they have not received a repayment or reimbursement from their employer in the context of an interest-free adjustment.

Proposed effective/Applicability dates

These provisions will generally be effective on the date the final regulations are published in the Federal Register and will apply to quarters beginning after that date. The IRS has stated that it intends to finalize these regulations in 2013 and that taxpayers may rely on these proposed regulations for tax periods beginning before the date that the final regulations are published.

More Affordable Care Act proposed regs and guidance

• Proposed rule for health insurance market reforms issued
• Healthcare reform (ACA): Proposed guidance on wellness programs

Martin Simon, JD is a Senior Legal Editor for BLR’s human resources and employment law publications. Mr. Simon has worked in legal publishing for over 25 years. He worked for 7 years as a legal editor for Prentice Hall, where he wrote and edited for the Pension and Profit Sharing and the Plan Administrators Compliance Manual looseleaf services. He has been a legal editor for BLR for more than 20 years. Mr. Simon has been on the Board of the Hartford Chapter of Working in Employee Benefits for 4 years. Mr. Simon has a BA degree with Honors from the University of Connecticut, where he was a member of the Honors Program and Phi Beta Kappa. He received his law degree from the University of Connecticut and is a member of the Connecticut Bar.