updated on March 13, 2018
Passage of the 2017 tax act (H.R. 1), which limits the tax deductions that businesses can claim for certain employee benefits, is likely to cause some employers to revisit their offerings.
The measure, informally referred to as the Tax Cuts and Jobs Act, was passed by Congress on Dec. 20 and signed into law by President Donald Trump two days later. Here is a provision-by-provision explanation of the legislation, released by the joint congressional committee that reconciled different tax bills passed earlier by the House and Senate.
The tax act ends the individual mandate to purchase health coverage beginning in 2019 and changes the deductibility of executive compensation and alters tax withholding beginning in 2018. This article highlights the key tax changes affecting employee 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.
For 2018, the tax-excludable limit for both transportation and parking expenses will be $260 per month, while the exclusion for biking expenses would stay at $20, the IRS announced in October 2017.
The tax bill eliminates the business deduction for qualified mass transit and parking benefits, except as necessary for ensuring the safety of an employee, beginning in 2018. Mass-transit and parking benefits, however, will continue to be tax exempt to employees, who can pay their own mass transit or workplace parking costs using pretax income, through an employer-sponsored salary-deduction program.
Tax-exempt employers aren't spared; they will be subject to the tax on unrelated business income for any qualified transportation benefits provided to employees.
The biking benefit is treated a bit differently. The legislation 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. This means that employer reimbursements for bicycle commuting expenses are taxable and subject to payroll taxes and income tax withholding.
"On its own, eliminating the tax deduction for employers may seem like a disadvantage to offering these benefits, although some employers would still need to do so to stay competitive and to comply with state and local laws," said Bobbi Kloss, HR leader at Benefit Advisors Network (BAN), a Cleveland-based consortium of health and welfare benefit brokers.
"Employers should look to see how, or if, the decrease in the corporate tax rate [which will fall from 35 percent to 21 percent, starting in 2018] offsets any loss of the deduction," Kloss advised.
Some businesses are likely to stop subsidizing their employees' mass transit and parking costs while allowing employees to contribute their own dollars through pretax payroll programs.
"Employers that rent space from the same entity that owns the applicable parking facility might be able to renegotiate their lease in a way that includes free parking," suggested Lowell J. Walter, a tax attorney with Carlton Field in Tampa, Fla.
"Employers who were simply giving away parking and transit passes in prior years"—and claiming the business deduction—"may want to switch to a pretax salary reduction plan starting in 2018," advised Mark Stember, a partner with Kilpatrick Townsend in Washington, D.C.
Still, other employers will continue to contribute to their workers' transit costs even without the business deduction.
"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., in an interview with SHRM Online before the bill was passed. The credit union provides its employees with both mass transit and biking subsidies.
Paid Leave Credit for Employers
The bill puts in place a federal tax credit for employers that provide paid family and medical leave to their employees, beginning in 2018. Eligible employers can 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).
To receive the credit, employers will 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 will 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 will 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 will only be able to apply the credit toward workers who earn below $72,000 per year, however.
Both full-time and part-time workers, if employed at the organization for at least a year, must be offered paid leave for an employer to be able to claim the tax credit, explain benefits attorneys at Littler in an online analysis. In addition, employers must allow part-time employees to take a commensurate amount of paid leave, determined on a pro-rata basis.
The measure had been introduced in a stand-alone bill by Sen. Deb Fischer, R-Neb. "Creating the first-ever nationwide paid family leave policy will be a huge step forward for American women and working families," Fischer said in a written statement.
Employers and benefit consultants are taking a wait and see approach. While a tax credit would be welcome, and also could be an incentive for businesses that don't provide paid family and medical leave to consider doing so, employers will want to see the details in forthcoming regulation.
"It will take a while to get the logistics in place for tracking who is eligible and for employers to calculate the potential tax credit," said Kim Buckey, vice president of client services at Birmingham, Ala.-based DirectPath, an employee engagement, health care transparency and compliance company.
Kloss noted that the program is something of a trail run that will end after 2019 unless extended by Congress. "This is still a far cry from being required to provide paid leave, and an even farther cry from the President's campaign promise of six weeks paid maternity leave for women," she commented.
Employers taking advantage of the paid leave credit "will need to review their current leave policies and ensure that they meet the required guidelines for the program," Kloss advised. They should also review state and local leave legislation to ensure there are no conflicts with the leave credit program.
"This is a step in the right direction, but it is only a half measure at best," said Tom Spiggle of the Spiggle Law Firm in Arlington, Va., which represents employees. "This is not a requirement to pay employees, only a credit, which means that many employers will not provide paid leave, even though the company is eligible for the tax credit," Spiggle added.
In November, a separate bill to expand paid leave and workplace flexibility opportunities, developed with the support of the Society for Human Resource Management (SHRM), was introduced in Congress. That measure, the Workflex in the21st Century Act (H.R. 4219), would give employees more options and flexibility when taking time off to meet their individual and family needs while providing predictability for employers who now face a hodgepodge of overlapping state and local requirements.
To learn more, see the SHRM Online articles Taking Advantage of the New Paid-Leave Tax Credit and How to Calculate the Paid-Leave Tax Credit,.
[SHRM members-only guide: How to Develop and Administer Paid Leave Programs]
Defined Contribution Retirement Plans
Under current rules for 401(k) and similar defined contribution plans, participants with a plan loan outstanding must repay the loan within 60 days of their departure. Those who fail to do so are considered to have defaulted on the loan and must pay income tax on the loan's balance. Borrowers younger than 59½ also must pay a 10 percent penalty.
Borrowers may avoid having their loan become a taxable withdrawal by contributing to an IRA or to another qualified employer plan in an amount equal to the defaulted loan. The contribution is then treated as a rollover that offsets an outstanding loan amount after separation from employment and, under current law, must be made within 60 days of the employee's departure.
The tax act extends this deadline to the latest date on which the participant can file his or her tax return for the year of the loan default.
"This won't affect many employees, but it's a nice add, giving individuals additional time to replace the money," said Buckey.
Some tax reformers had advocated limiting or even eliminating pretax 401(k) plan contributions in favor of Roth contributions made with after-tax dollars, in order to generate revenue that would offset tax cuts.
"Remember where we started," noted Brian Graff, CEO of the American Retirement Association, a trade association for retirement plan service providers and sponsors, in Arlington, Va. "There were proposals on Rothification, cutting or freezing retirement plan contribution limits, eliminating 403b and 457 plans, and basically eliminating all forms of nonqualified deferred compensation. In the end, we were able to beat back all of those."
[SHRM members-only toolkit: Designing and Administering Defined Contribution Retirement Plans]
529 Educational Savings Plans
A 529 plan is a tax-advantaged savings vehicle designed to encourage saving for future college costs. The tax law now allows 529 plan assets to be used to pay elementary and high school tuition, in addition to college tuition and related college expenses, such as books and often room and board.
According to SHRM's 2017 Employee Benefits report, 11 percent of HR professionals work at organizations that allow employees to fund a 529 plan through payroll deduction, and 2 percent work for employers that provide a contribution or match for an employee's 529 plan.
529 accounts are funded with post-tax dollars. They assets can be invested and grow free of federal and state taxes. Withdrawals are tax-free if they are used to pay eligible education expenses. Most 529 plans are offered by states, and typically they are open to all savers, not just state residents. About three dozen states provide a state-income-tax deduction or credit for savers who contribute to the plan, although some only allow a tax break for contributions to in-state plans.
The tax overhaul also enables savers to transfer up to $15,000 a year from a 529 plan to a 529 ABLE account that offers tax-advantaged savings for those who become blind or disabled before age 26, without affecting eligibility for benefits such as Medicaid.
Using 529 plan withdrawals for private-school fees will lessen the time that assets can compound tax-free to pay for college costs, financial advisors said. Also, private elementary and secondary schools may start to take into account a family's 529 plan savings when making financial-aid decisions.
Currently, an employer's deduction for the cost of an employee achievement award is limited to $400 for awards of "tangible personal property" given to any one employee annually that are not classified as qualified plan awards. IRS regulations define "employee achievement award" to include length-of-service awards or safety awards given during "meaningful presentations." The award should "not create a significant likelihood of the payment of disguised compensation."
A higher limit of $1,600 applies to qualified plan awards bestowed under a written plan that does not discriminate in favor of highly compensated employees, but there are additional limitations. For instance, an award cannot be treated as a qualified plan award if the average cost per recipient of all such awards is more than $400 in a given year.
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) can be excluded from an employee's taxable gross income.
The tax legislation states that awards of tangible personal property may still be treated as deductible by the employer, but provides that tangible personal property exclude 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.
The change may not have a huge impact on whether to bestow these awards but it's a further complication that employers need to take into account. They will need to identify awards that will now be taxable fringe benefits and deduct payroll taxes accordingly.
"This could be a boon to companies that provide service or other awards such as pins, jewelry or other items selected from a catalog" that won't be taxable, Buckey said. "In my experience, these can serve as a more tangible reminder of an employer's appreciation than a gift card or cash that's spent on something and soon forgotten."
To learn more, see the SHRM Online article Achievement Awards Still Deductible—Within Limits—Under Tax Act.
Other Fringe Benefits
Among other changes, the tax act will alter the tax treatment of the these popular perks:
- Moving expenses. The act suspends both the business deduction and the exclusion from taxable income for recipients of employer-paid moving expenses for taxable years 2018 through 2025, except for certain active-duty members of the armed forces. Additionally, job-related moving expenses paid for by the individual and not reimbursed by an employer are taxable.
- Onsite gyms. The deduction for onsite gyms is repealed, treating funds used to pay for on-premises athletic facilities as unrelated business taxable income. Employees, however, can continue to exclude the benefit from income after 2017.
- Meals. The deduction for expenses related to employee meals is repealed but employees can continue to exclude the benefit from income. However, the tax act 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 onsite facility are not deductible.
Employee Business Expenses
"Basically, employer payment or reimbursement of an employee's business expenses (so-called working condition fringe benefits) will continue to be tax-free to the employee and tax deductible by the employer," explained Bruce H. Schwartz, a principal at Jackson Lewis in White Plains, N.Y., in an online post. However, "certain fringe benefits that still can be provided tax-free to an employee will no longer be tax deductible by the employer," such as mass transit subsidies.
On the other hand, "if an employer chooses to provide the affected fringe benefits on a taxable basis to the employee (i.e., as W-2 wages), the employer will be able claim a tax deduction for the taxable benefits," Schwartz pointed out.
For unreimbursed business expenses, however, an employee who itemized tax deductions prior to the tax act could deduct these expenses as a miscellaneous itemized deduction "to the extent that the aggregate miscellaneous itemized deductions exceeded 2 percent of the employee's adjusted gross income," Schwartz said.
But beginning Jan. 1, 2018, miscellaneous itemized deductions are no longer allowed. "That means that if an employer reimburses an employee for a business expense, the reimbursement is tax-free to the employee. However, if the employer does not reimburse the employee's business expense, the employee no longer will be able to claim a tax deduction for the expense."
Related SHRM Articles:
Achievement Awards Still Deductible—Within Limits—Under Tax Act, SHRM Online Benefits, February 2018
How to Calculate the Paid-Leave Tax Credit, SHRM Online Benefits, February 2018
Taking Advantage of the New Paid-Leave Tax Credit, SHRM Online Benefits, January 2018
IRS Releases New Withholding Tables for 2018, SHRM Online Compensation, January 2018
Tax Act Alters Executive Pay, Affects Bonus Deductions and Withholding, SHRM Online Compensation, December 2017
What the Individual Mandate Repeal Means for Employers, SHRM Online Benefits, December 2017
What Happens After Tax Law Scuttles Employers' Deduction for Commuting Benefits?, SHRM Online Benefits, December 2017
Final Tax Bill Dices and Splices Benefit Changes, SHRM Online Benefits, December 2017
SSA Revises Payroll Tax Cap for 2018; Tax Bill Alters Rates and Brackets, SHRM Online Compensation, November 2017 (updated December 2017)
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