Final Tax Bill Dices and Splices Benefit Changes

The 'reconciled' bill draws from House and Senate measures to alter workplace deductions

Stephen Miller, CEBS By Stephen Miller, CEBS December 16, 2017
Final Tax Bill Dices and Splices Benefit Changes

Update: Congress Passes Tax Cuts and Jobs Act

On Dec. 20, 2017, Congress passed the Tax Cuts and Jobs Act. See these SHRM Online articles:

Congress Passes Tax Bill Altering Employee Benefits 

Tax Bill Alters Executive Pay, Affects Bonus Deductions and Withholding 

What the Individual Mandate Repeal Means for Employers

The article below shows how specific employee benefits would be treated under the final bill as compared to earlier House and Senate versions of the legislation.

Tuition benefits will remain tax-deductible for employers under a final version of the 2017 tax act that draws from separate measures passed by the House and Senate. But many provisions in the House bill that would have eased regulations on qualified retirement plans didn't make it into the final legislation. 

Limits on the deductibility of executive compensation were carried over from the House and Senate bills, and the final measure keeps the Senate's provision to end the mandate that individuals purchase health coverage compliant with the Affordable Care Act (ACA) or pay a tax penalty.

After the U.S. Senate has approved its comprehensive tax bill, a joint congressional committee reconciled the Senate's version with the measure passed by the House of Representatives. Each bill handled business deductions and income exclusions for certain employee benefits differently.

The Senate passed H.R. 1, the Tax Cuts and Jobs Act, by a vote of 51 to 49 in the early hours of Dec. 2, with no Democratic support. The House passed its version of the legislation by a vote of 227-205 on Nov. 16, also with no Democrats voting in favor. (Prior to passage of the reconciled bill on Dec. 20, the Senate parliamentarian forced the name of the legislation to be changed, although the measure is still informally referred to as the Tax Cuts and Jobs Act.)

Before recessing for the year, both chambers must vote again to pass the compromise legislation before it can be signed into law by President Donald Trump.

The Society for Human Resource Management's (SHRM's) Government Affairs team has put together a comparison chart of the workplace provisions in the House, Senate and final tax bills, and some of the key differences are noted below.

Tuition Benefits

The House bill would have eliminated the employer-provided education assistance deduction under Internal Revenue Code Section 127, which allows employers to provide up to $5,250 of tax-free tuition aid to an employee per year at the undergraduate, graduate or certificate level. The Senate version did not eliminate the education assistance deduction.

"Eliminating the tax treatment for employer-provided education assistance has consequences for employers and employees," said Kathleen Coulombe, senior advisor for government relations at SHRM. "Employers use this benefit to attract and retain talent but also to retrain and reskill their employees to compete in an ever-changing global economy. If enacted, employees receiving this assistance will be penalized by being taxed on that benefit."

Mike Aitken, SHRM's vice president for government affairs, wrote to congressional leaders that it was "imperative" that Congress "preserve the tax treatment of vital benefits" such as employer-provided education assistance and "ensure tht other critical benefits are not eliminated or complicated."

If a tax bill were enacted that eliminates the Section 127 education deduction, "employers would still be able to offer the separate Section 132 working condition fringe tax-free educational benefit for work-related educational expenses," said Brian Gilmore, lead benefits counsel at ABD Insurance and Financial Services in San Mateo, Calif.

Under Section 132(d), employers can offer tax-free working-condition benefits, but only for education that maintains or improves job skills or meets requirements for the employee to remain in his or her current position.

Final Bill

Employer-provided tuition assistance will remain tax-free, as conference members scrapped a House plan to make that benefit count as taxable income for employees.

The final bill preserves the Section 127 tax exclusion that allows employers to provide up to $5,250 of education assistance per year tax free to their employees at the undergraduate, graduate or certificate level.

It also preserves the Section 117 tax exclusion for educational assistance for employees, their spouse or dependents at educational institutions.

Effect on Employers:

"For decades, the Society for Human Resource Management has championed the importance of employer-provided tuition assistance," said SHRM's Coulombe. "The House and Senate conference report ensures that the tax treatment of this vital benefit will be preserved. This is a win for human resources, for employers who invest in their workforce and for the employees who power the economy in America."

[SHRM members-only toolkit: Designing and Managing Educational Assistance Programs]

Individual Health Coverage

The Senate's bill would effectively repeal the ACA's individual mandate, which requires most Americans to have health insurance, by reducing to zero the tax penalty for going without coverage. The House bill left the individual mandate in place. 

Neither bill would alter the ACA's mandate that employers with 50 or more full-time equivalent employees offer their full-time workers ACA-compliant health coverage, nor would they change employers reporting obligations under the ACA.

Final Bill

The Senate bill's provision was adopted in the final measure, reducing the individual mandate penalty to zero. The provision will become effective in 2019.

Effect on Employers:

"Repeal of the ACA individual mandate will likely have a direct and indirect impact on employer-sponsored plans," said Chatrane Birbal, senior advisor, government relations at SHRM. Without the mandate, "if healthier individuals leave the ACA exchanges, this may result in cost-shifting to employers and other private-sector payers as well as the federal government."

"Some employers may see fewer health plan enrollees if the individual mandate is repealed," said Scott Behrens, vice president and ERISA compliance attorney at Lockton Compliance Services in Kansas City, Mo., but "the ACA employer mandate will remain, which means large employers will still need to offer coverage meeting minimum standards to avoid penalties."

Paid Leave Credit for Employers

Senate Republicans added an employer credit for paid family and medical leave to their bill. This proposal would allow eligible employers to claim a general business credit equal to a percentage of wages paid to qualifying employees on leave under the Family and Medical Leave Act (FMLA). 

Employers would have to provide at least two weeks of leave and compensate their workers at a minimum of 50 percent of their regular earnings. The tax credit would range from 12.5 percent to 25 percent of the cost of each hour of paid leave, depending on how much of a worker’s regular earnings the benefit replaces. The government would cover 12.5 percent of the benefit’s costs if workers receive half of their regular earnings, rising incrementally up to 25 percent if workers receive their entire regular earnings. Employers would only be able to apply the credit toward workers who earn below $72,000 per year.

The House bill did not include this provision.

Final Bill

The Senate version made it into the compromise bill. Employers will get a tax credit of 12.5 to 25 percent of the wages paid to a qualified employee using FMLA, beginning with tax years after 2017.

Effect on Employers:

An employer would be able to claim a credit during any period in which employees are paid while on FMLA leave if the rate of payment is at least 50 percent of wages normally paid to employees.

Commuting Benefits

Under current IRS limits, in 2017 employee transit benefit programs can allow employees to use pretax dollars and employers to deduct their contributions of:

  • $255 per employee per month in transportation expenses.
  • $255 per employee per month in parking expenses.
  • $20 per employee per month for biking-related expenses.

Both the House and Senate bills would have eliminated the business deduction for qualified mass transit and parking benefits. Tax-exempt employers would be subject to the tax on unrelated business income for any qualified transportation benefits provided to employees. These benefits, however, would continue to be tax exempt to employees, who could pay their own mass transit or workplace parking costs through an employer-sponsored program, using pretax income.

The Senate bill eliminated the tax exclusion on costs related to biking to work, while the House bill did not.

Final Bill

The final measure adopted the House/Senate provision eliminating the business deduction for qualified mass transit and parking benefits (except as necessary for ensuring the safety of an employee).

It also adopted the Senate provision that suspends the exclusion from gross income and wages for qualified bicycle commuting reimbursements for taxable years beginning after Dec. 31, 2017 and before Jan. 1, 2026.

Effect on Employers:

After the bill is enacted, it's possible that more employees nationwide would be able to pay for mass transit and parking costs through pretax payroll deductions but will no longer receive an employer subsidy for these benefits. Still, many employers would continue to contribute to their employees' transit cost if the business deduction for commuter benefits were eliminated.

"Even though we'd be disappointed, the tax deduction wasn't the motivation behind the benefit so we wouldn't expect the loss of it to impact [our] program," said Gayle M. Evans, senior vice president and chief HR officer at Unitus Community Credit Union in Portland, Ore., which provides its employees with both mass transit and biking subsidies.

[See the SHRM Online article What Happens If Tax Reform Scuttles Employers' Deduction for Commuting Benefits?]

Dependent Care FSAs

The House bill ended tax-free contributions of up to $5,000 per year to dependent care flexible spending accounts (FSAs) under tax code Section 129, effective after 2022. The tax preferences for health care FSAs remain unchanged.

The Senate bill did not alter dependent care FSAs.

Final Bill

The final bill preserves the tax treatment of dependent care flexible spending accounts of up to $5,000 per year under Section 129.

Defined Contribution Retirement Plans

Under current 401(k) rules, hardship distributions from 401(k) retirement plans are limited to the elective deferral amount not including earnings, and employees are prohibited from making new contributions for six months after receipt of a hardship distribution.

The House bill "would allow employees to not only withdraw their own money but also to take the earnings on the money and potentially the company contributions," said Robyn Credico, Washington, D.C.-based director of defined contribution consulting at Willis Towers Watson, an HR advisory firm. "More importantly, employees who take hardship withdrawals would not be required to suspend their contributions to the plan, thereby allowing them to continue to get the company match and not have to remember to rejoin the plan when the suspension ends," she said.

If a participant has a plan loan outstanding and his or her employment ends, the participant may avoid tax penalties that treat the loan as a taxable withdrawal by making a contribution to an IRA or a qualified employer plan in an amount equal to the defaulted loan. The contribution is treated as a rollover of the loan offset amount and under current law must be made within 60 days of the default. The House and Senate bills extend this deadline to the latest date on which the participant can file his or her tax return for the year of the loan default.

"Collectively, these provisions will help people facing emergencies or financial challenges to put money they withdraw from their 401(k) plan back into the plan and allow them to continue saving for retirement," said James Klein, president of the American Benefits Council in Washington, D.C., which represents benefit plan sponsors.

Final Bill

The final bill makes no changes to in-service distributions for defined contribution plans or to the rules related to contributions following hardship distributions.

A provision in the House bill that would have set deferral and catch-up contribution limits for 457 plans offered by state and local governments at the same levels as 401(k) and 403(b) plans was not included in the final bill.

The final measure does adopt the House and Senate provision that changes repayment options for qualified defined contribution plans, including 401(k), 457 and 403(b) plans, to allow rollovers to offset an outstanding loan amount after separation from employment to take place by the deadline for the participant to file his or her tax return.

Multiple Employer 401(k)s

The House bill would have made it easier for unrelated employers to join together in a shared defined contribution multiple employer plan (MEP). Currently, employers participating in so-called "open MEPs" must file individual Form 5500s, which then requires individual plan audits for participating employers if their size so warrants.

The Senate bill lacked this provision.

Final Bill

The House provision was not included in the final tax legislation.

Defined Benefit Pensions

The House bill would have reduced from 62 to 59-½ the age at which workers could begin to receive defined benefit pension benefits even though they continue to work for the employer who sponsors the pension plan. "This change will allow workers to reduce the hours they work and still collect their pension benefits, rather than forcing them to work for another employer or retire altogether," Klein said.

Defined benefit plans that are closed to new employees but that allow existing employees to continue to accrue benefits can, over time, run afoul of rules against discriminating in favor of highly compensated employees. Under the House bill, a new Section 1506 would provide nondiscrimination testing relief to certain employers with closed defined benefit plans, "provided they give new employees an increased benefit in a defined contribution plan," explained the American Society of Pension Professionals & Actuaries, a trade group in Arlington, Va.

The Senate bill did not contain these provisions.

Final Bill

The final measure makes no changes to in-service distributions, and leaves in place the current nondiscrimination testing rules for defined benefit pension plans.

Executive Pay

Both the House and Senate bills would have changed the taxation of executive compensation. For instance, both bills would create a 20 percent excise tax for nonprofits, including 501(c)(5) and 501(c)(6) organizations, on the compensation of the five highest-paid employees who earn more than $1 million.

Both measures also would have amended Internal Revenue Code Section 162(m), which prohibits publicly held companies from deducting more than $1 million per year in compensation paid to senior executive officers, to eliminate the exemption for performance-based pay.

Final Bill

The final bill amends Internal Revenue Code Section 162(m), which prohibits publicly held companies from deducting more than $1 million per year in compensation paid to senior executive officers, to eliminate the exemption for commission- and performance-based pay, and expands the scope of covered individuals to include an organization's CEO, CFO and three highest-paid employees. This would apply to taxable years beginning Jan. 1, 2018.

A transition rule applies to remuneration which is provided pursuant to a written binding contract which was in effect on Nov. 2, 2017 and which was not modified in any material respect on or after such date.

The compromise legislation creates a 20 percent excise tax for nonprofits—including 501(c)(3), 501(c)(6)—on the compensation of the five highest-paid employees who earn more than $1 million. The compensation is treated as paid when there is no substantial risk of forfeiture. The taxable rate will be equal to the corporate rate of 21 percent. Effective for tax years after 2017.

Effect on Employers: 

Compensation advisers are recommending that employers:

• Review compensation arrangements. As the final bill moves toward a final vote, affected employers should "be prepared to convene their compensation committees on short notice—possibly during this holiday season—to make important decisions on compensation arrangements for their top officers," advised Melissa Ostrower, a principal with Jackson Lewis in New York City, and Alec Nealon, of counsel at the firm.

In particular, "tax-exempt entities should review their existing executive compensation arrangements now and consider whether any changes should be made if, and when, the legislation is enacted," they recommended. "Additionally, tax-exempt entities should consider including protective language in any new executive compensation arrangements that would allow them to modify or reduce compensation to the extent needed to avoid the new excise taxes."

• Consider accelerating bonus deductions. The final bill provides for a 21 percent corporate tax rate beginning in 2018, down from the current 35 percent rate. The bill would not change the treatment of bonus deductions, "but lower corporate rates may encourage companies to accelerate bonus deductions into 2017," said Carol Silverman, a principal with HR consultancy Mercer in New York City. 

Bonuses are generally deducted in the year paid and most employers pay bonuses in the year after the employee performs the services being rewarded. However, except for taxpayers using accrual-basis accounting, "business can deduct amounts for bonuses earned in the performance year if the bonus is paid within 2½ months of year-end, as long as performance-related goals are met before year-end and the amount can be determined with reasonable accuracy," she noted.

Achievement Awards

Currently, an employer's deduction for the cost of an employee achievement award—such as those given an employee in recognition of length of service—is limited to a certain amount. Employee achievement awards that are deductible by an employer (or would be deductible but for the fact that the employer is a tax-exempt organization) are excludible from an employee's taxable gross income.

The House bill included the value of achievement awards as taxable income for individual employees.

The Senate bill created a new category related to employee achievement awards entitled "tangible personal property." The exclusion for some employee achievement awards would be preserved. However, employees would not be able to exclude from taxable incomeand employers cannot qualify as a business expensecash, cash equivalents, gift cards, gift certificates, vacations, meals, lodging or tickets to theater or sporting events.

Final Bill

Adapts the Senate version. The final bill adds a definition of “tangible personal property” that may be considered a deductible employee achievement award, but provides that tangible personal property not include cash, cash equivalents, gift cards, gift coupons or gift certificates (other than arrangements conferring only the right to select and receive tangible personal property from a limited array of such items pre-selected or pre-approved by the employer), or vacations, meals, lodging, tickets to theater or sporting events, stocks, bonds, other securities, and other similar items. This provision takes effect in 2018.

Plus a Few Others

The House bill repealed the tax exclusion for adoption assistance, making this benefit taxable to recipients, and the business deduction for on-premise athletic facilities. The Senate bill kept these, but scuttled the deduction for employee meals prepared at onsite food facilities.

Both bills eliminated the tax exclusion related to employee moving expenses, but the Senate bill would do so only until December 2025, after which the elimination would sunset.

Final Bill

The final provision makes no changes to the tax exclusion for adoption assistance.

It suspends both the tax exclusion and the deduction related to moving expenses for taxable years 2018 until 2025. Value of the benefit will be included as taxable income and the deduction will be eliminated for individual taxpayers, except for members of the Armed Forces.

The tax credit for employee child care facilities remains.

The deduction for onsite gyms is repealed, treating funds used to pay for on-premises gyms and other athletic facilities as unrelated business taxable income. Employees can continue to exclude the benefit from income after 2017.

The deduction for expenses related to employee meals is repealed but employees can continue to exclude the benefit from income. However, it also expands the 50 percent limit to de minimus fringe benefits to onsite eating facilities until Dec. 31, 2025. Afterwards, employer costs for  providing food and beverages to employees through an eating facility are not deductible.

Except as regards expenses for employee meals, these provisions take effect on Jan. 1, 2018.

2018 Tax Rates

The House version of the tax bill would have reduced the seven current income-based tax rates to four: 12 percent, 25 percent, 35 percent and 39.6 percent. The Senate version would have lowered the top individual tax rate but kept the current number of individual tax brackets at seven.

Final Bill

The number of tax brackets remains at seven but the tax rates are lowered and income ranges are different.

  • Current tax rates: 10 percent, 15 percent, 25 percent, 28 percent, 33 percent, 35 percent and 39.6 percent.
  • New tax rates: 10 percent, 12 percent, 22 percent, 24 percent, 32 percent, 35 percent and 37 percent.

View a table showing the new rates and income ranges.

The Tax Cuts and Jobs Act also states that among other income tax adjustments for 2018:

  • The deduction for personal exemptions, which had been $4,050 for 2017, is suspended until taxable years after Dec. 31, 2025.
  • The standard deduction for single taxpayers and married taxpayers filing separately rises to $12,000 from $6,350.
  • The standard deduction for married taxpayers filing joint returns rises to $24,000 from $12,700.
  • The standard deduction for heads of household rises to $18,000 from $9,350.

Related SHRM Article:

What Happens If Tax Reform Scuttles Employers' Deduction for Commuting Benefits?, SHRM Online Benefits, December 2017

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