February 8, 2022
Massachusetts Department of Revenue will not recognize certain fringe benefit exclusions under temporary federal COVID-19 provisions
The Massachusetts Department of Revenue announced in TIR-22-2 that because the state's personal income tax law generally conforms to the federal Internal Revenue Code (IRC)as of January 1, 2005, several fringe benefits temporarily excluded from federal income tax due to COVID-19 are not exempt for Massachusetts state income tax and withholding purposes.
Following are provisions of the federal Coronavirus Aid, Relief, and Economic Security Act, (CARES Act), the COVID-Related Tax Relief Act of 2020 (CTRA), the Taxpayer Certainty and Disaster Tax Relief Act of 2020 (TCDTRA), and the American Rescue Plan Act of 2021 (ARPA) and whether they apply for Massachusetts personal income tax and withholding purposes.
Extension of exclusion for certain employer payments of student loans
Under the federal CARES Act, as amended by the TCDTRA, certain payments made by an employer for principal or interest in connection with student loans incurred by an employee for the education of the employee are excluded from gross income under IRC Section 127, effective January 1, 2021 and through January 1, 2026. The exclusion from gross income for both employer-paid nonjob-related education and the repayment of student loan principal and interest is capped at $5,000 for the year.
Additionally, IRC Section 221(e)(1) disallows a deduction for interest paid by an employee on such loans.
Massachusetts conforms to IRC Sections 127 and 221 as of 2005. Therefore, student loan payments made by an employer are not excluded from an employee's Massachusetts gross income. Likewise, Massachusetts does not conform to the disallowance of the deduction for interest paid by an employee on such loans. (See TIR 20-9.)
Increased exclusion for employer-provided dependent care assistance
For tax year 2021 only, ARPA amended IRC Section 129 to increase the amount excluded from gross income for employer-paid dependent care assistance from $5,000 to $10,500. (See IR-2021-105.)
Massachusetts follows IRC Section 129 as in effect in 2005. Therefore, Massachusetts did not adopt the increased exclusion amounts. The Massachusetts exclusion amounts continue to be $2,500 for married individuals filing separate returns and $5,000 for all other taxpayers.
Exclusion of certain COBRA premium assistance from gross income
ARPA created IRC Section 139I, which excludes certain COBRA (Consolidated Omnibus Budget Reconciliation Act of 1985) continuation coverage subsidies provided to certain individuals who were either involuntarily terminated or suffered a reduction of hours from employment from April 1, 2021 through September 30, 2021 from federal gross income. The exclusion applies to taxable years beginning on or after January 1, 2021.
Massachusetts follows the 2005 Code with respect to IRC Section 139I. IRC Section 139I was not in the 2005 Code. Therefore, such COBRA continuation coverage subsidies provided to certain individuals must be included in Massachusetts gross income.
Temporary special rules for flexible spending accounts
For 2021 and 2022, the TCDTRA made several temporary changes to health and dependent care flexible spending arrangements (FSAs) that allow employers to extend eligibility requirements and allow additional time to use balance carryovers for participating employees. (See the IRS website.)
Because these temporary federal changes pertain to how and when FSA amounts may be used and does not affect the inclusion/exclusion from federal gross income, Massachusetts follows the IRC for FSAs as currently amended.
Temporary allowance of full deduction for business meals
Effective January 1, 2021 through December 31, 2022, TCDTRA temporarily amended IRC Section 274(n) to allow a deduction for the full cost of food and beverages provided by a restaurant. The deduction under the federal Tax Cuts and Jobs Act (TCJA) is limited to 50% of the cost of such food and beverages. (See IRS Notice 2021-63.)
Massachusetts explicitly conforms to IRC Section 274(n); therefore, for personal income tax purposes, Massachusetts allows for the 100% deduction for tax years 2021 and 2022.
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