SHRM: Preserve Favorable Tax Treatment of Employee Benefits

If Senate tax bill passes, both chambers must reconcile differences

Stephen Miller, CEBS By Stephen Miller, CEBS November 28, 2017


The House passed H.R. 1, the Tax Cuts and Jobs Act, by a vote of 227-205, with no Democratic support, on Nov. 16.

The Senate passed its version of the bill by a vote of 51 to 49 on Dec. 2, also with no Democratic support.

See the SHRM Online article Final Tax Bill Dices and Splices Benefit Changes.

Eliminating the tax exclusion for employer-provided education assistance, as the House tax reform bill proposes, could inhibit employers' ability to recruit top talent and to compete in the global marketplace, according to the Society for Human Resource Management (SHRM). So, too, could taxing employer-provided benefits such as moving expenses, transportation and meals, as both the House and Senate versions of tax reform would do.

The House passed its version of the Tax Cuts and Jobs Act by a vote of 227-205 on Nov. 16 with no Democratic support. The Senate is expected to vote as early as Nov. 30 on its version. If the Senate measure passes, then both chambers would work to reconcile the differences between their versions of the legislation.

SHRM's Government Affairs team has put together a comparison chart of the workplace provisions in both the House and Senate bills.

Educational Assistance at Risk

The House bill would eliminate the employer-provided education assistance deduction under Internal Revenue Code Section 127, which 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.

The Senate version does not eliminate the education assistance deduction.

"The bill eliminates only the Section 127 qualified program that does not require the employee's educational expenses be work-related. 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), for instance, employers can offer tax-free working-condition benefits that include education that maintains or improves job skills or meets requirements for the employee to remain in his or her current position. Nevertheless, Section 127 has been the go-to tax code provision that employers use to provide broad-based education benefits on a tax-free basis.

"Eliminating the tax treatment for employer-provided education assistance [under Section 127] 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."

In a letter to the leadership of the Senate Committee on Finance, Mike Aitken, SHRM's vice president for government affairs, called it "imperative" that congress "preserve the tax treatment of vital benefits" such as employer-provided education assistance and "ensure that other critical benefits are not eliminated or complicated."

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

A Health Care Wildcard

Unlike the House measure, the Senate's bill, as of now, would effectively repeal the Affordable Care Act's (ACA's) individual mandate, which requires most Americans to have health insurance or pay a penalty tax.

"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 in place, "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."

Scott Behrens, senior benefits attorney with Lockton Compliance Services in Kansas City, Mo., said that "some employers may see fewer health plan enrollees if the individual mandate is repealed," but "the ACA employer mandate will remain, which means large employers will still need to offer coverage meeting minimum standards to avoid penalties."

Executive Pay

Both the House and Senate bills would change the taxation of executive compensation. For instance, they would amend 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.

The legislation also creates 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.

"Most nonprofits exercise complete due diligence and extreme care when creating a compensation structure for their executives," Aitken wrote to Congress. He warned against provisions that could inadvertently "penalize nonprofits" and hinder their ability to compete with the private sector when hiring executive talent.

Related SHRM Articles:

House GOP Tax Bill Spares 401(k)s but Kills Other Benefit Deductions, SHRM Online Benefits, November 2017

Tax Reform Would Scrap Tax-Free Tuition Reimbursements, SHRM Online Employment Law, November 2017

Senate Tax Bill Altered to Kill the ACA's Individual Mandate, SHRM Online Benefits, November 2017.

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