SHRM: Congress Poised to Pass Tax Bill Altering Employee Benefits
The looming passage of the Tax Cuts and Jobs 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.
On Dec. 19, both the House and Senate passed the Tax Cuts and Jobs Act along party line votes. The House will take a second vote on the measure on Dec. 20, due to slight changes in the version the Senate passed. President Donald Trump said he will sign the measure into law.
Here is a provision-by-provision explanation of the final bill released by the joint congressional committee that reconciled different tax bills passed by the House and Senate.
The bill ends the individual mandate to purchase health coverage beginning in 2019 and changes the deductibility of executive compensation beginning in 2018; these issues will be covered in subsequent articles. 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 stays 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. Commuting 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.
“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 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.
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. “There will be strategy decisions to make with respect to whether to extend such leave to all employees—regardless of income—and, if the decision is made to limit to certain pay levels, how to explain that to employees.”
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.
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 50½ 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 Cuts and Jobs 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.”
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, safety awards and 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 soon forgotten.”
Other Fringe Benefits
Among other changes, the tax act will alter the tax treatment of:
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 until 2025.
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.
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(Stephen Miller, CEBS, Online Manager/Editor, Compensation & Benefits, SHRM Online)