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House and Senate measures would alter workplace deductions in different ways
Now that the U.S. Senate has approved its comprehensive tax reform bill, the measure must be reconciled with a version passed by the House of Representatives. Each measure handles the health care individual mandate, education benefits and other deductions 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.
The Society for Human Resource Management's (SHRM's) Government Affairs team has put together
a comparison chart of the workplace provisions in both the House and Senate bills, and some of the key differences are noted below.
Before recessing for the year, both chambers will work to reconcile the differences between their versions of the bill, after which they each must vote again to pass the compromise legislation before it can be signed into law by President Donald Trump.
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 tax-free tuition aid to an employee per year at the undergraduate, graduate or certificate level. The Senate version does 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 that other critical benefits are not eliminated or complicated."
If a tax bill is 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.
[SHRM members-only toolkit:
Designing and Managing Educational Assistance Programs]
Individual Health Coverage
The Senate's bill would effectively repeal the Affordable Care Act's (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 leaves the individual mandate in place.
"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 does not include this provision.
Both the House and Senate bills would eliminate 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 eliminates the tax exclusion on costs related to biking to work, while the House bill does not.
[See the SHRM Online article What Happens If Tax Reform Scuttles Employers' Deduction for Commuting Benefits?]
Dependent Care FSAs
The House bill ends 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 does not alter dependent care FSAs.
Retirement Plan Loans and Distributions
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.
The House bill also gives workers who leave the employer more time—until they file their income tax return—to repay a loan from their 401(k) plan. "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.
The Senate bill does not provide this relief, but would set deferral and catch-up contribution limits for state and local government-sponsored section 457 plans at the same levels as 401(k) and 403(b) plans. The Senate measure would also repeal allowable contributions to 457 plans that may now be made for up to five years after separation from employment.
Multiple Employer 401(k)s
The House bill would make 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 lacks this provision.
A Small-Business Retirement Plan Disincentive?
Both the Senate and House tax reform proposals include provisions that would reduce the tax rate on business income for so-called pass-through entities (partnerships, S corps, and small business limited liability corporations).
An unintended consequences is that "many of those small business owners
would be penalized financially for making retirement plan contributions, and for establishing a workplace retirement plan for their workers," said Brian Graff, CEO of the American Retirement Association (ARA) in Arlington, Va. "And that's before taking into account the additional financial burdens of contributions to meet plan testing rules and administration costs, not to mention the ERISA fiduciary risks associated with operating and administering a qualified plan."
The impact on small businesses is a particular concern "since those who work for small businesses are significantly less likely to have access to a retirement plan at work than those who work for larger employers," he noted.
There is a simple solution to this problem, Graff explained: have the owner's allocable retirement plan contribution be separately stated and applied solely against income that is taxed at ordinary rates. However, "thus far the legislation is being rushed through without addressing this critical issue," he said.
Others contend that the negative affect of pass-through reform on the tax rate for small business owners' distributions from their 401(k) plans could be mitigated if the owners made post-tax contributions to a Roth 401(k) rather than pretax contributions to a traditional 401(k).
But a "Roth election, at best, can only apply to the elective contributions made to a 401(k) plan,"
responded Nevin Adams, chief of marketing and communications for the ARA. "There is no Roth option for matching contributions or discretionary profit sharing contributions. For a small business owner with the wherewithal to save, that amounts to $36,000 this year."
More to the point, he added, "there is no 'Roth' election whatsoever with regard to contributions made to a cash balance plan (or any other type of defined benefit plan). Cash balance plans are extremely popular with small business owners who, after plowing money into their business for many years, can finally start funding their retirement."
Defined Benefit Pensions
The House bill reduces from 62 to 59-½ the age at which workers may 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 does not contain these provisions.
Both the House and Senate bills would change 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 would also 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. However, the two versions differ regarding the specifics of those changes, and the distinctions will need to be reconciled.
Both House and Senate bills "would eliminate the performance-based compensation exemption from Code Section 162(m) and extend the reach of the limitations under that section to individuals and companies not currently covered, including some private companies," commented Michael S. Melbinger, a partner with Winston & Strawn in Chicago. "Large tax-exempt organizations will now face a similar limit."
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."
Plus a Few Others
The House bill would repeal the tax exclusion for adoption assistance, making this benefit taxable to recipients, and the business deduction for on-premise athletic facilities. The Senate bill would keep these, but scuttle the deduction for employee meals prepared at onsite food facilities.
Both bills would eliminate 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.
"Early proposals to negatively impact health, retirement and nonqualified deferred compensation plans were met with significant opposition. We are optimistic that those proposals will not resurface during conference committee discussions," said Behrens,
Related SHRM Articles:
What Happens If Tax Reform Scuttles Employers' Deduction for Commuting Benefits?,
SHRM Online Benefits, December 2017
Tax Reform Would Scrap Tax-Free Tuition Reimbursements,
SHRM Online Employment Law, November 2017
House GOP Tax Bill Spares 401(k)s but Kills Other Benefit Deductions,
SHRM Online Benefits, November 2017
Senate Tax Bill Altered to Kill the ACA's Individual Mandate,
SHRM Online Benefits, November 2017.
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