The Tax Cuts and Jobs Act (“tax reform”) was signed into law in late December, and if you are still processing how this law affects your business, you are not alone. The late passage date and far-reaching effects of the law have left many businesses struggling to understand where to focus their attention. While the final version of the law omits many of the employee benefits changes that were discussed at varying stages of the law’s development, the final version does in fact have (sometimes surprising) effects on employee benefits, and in some situations the way employers may choose to offer those benefits in 2018.
Tax Reform and the Affordable Care Act (ACA)
The most common question that I have gotten since tax reform passed is “does this repeal the ACA?” This question comes from the fact that tax reform does repeal a component of the ACA: the individual mandate. The individual mandate is the piece of the law that requires individuals to pay a tax if they do not maintain health coverage. The Supreme Court determined that the individual mandate was a tax when it considered the issue, so the mandate was on the table for repeal through tax reform. However, tax reform does not repeal any other aspects of the ACA. Employers with 50 or more full-time equivalent employees still have penalty exposure if they do not offer health coverage, and the ACA’s reporting requirements remain in effect. The individual mandate repeal is effective in 2019.
Many employers have historically assisted employees by paying for bus passes, parking, or other transportation-related expenses. These benefits have been part of the package of benefits offered to employees and have been a tax-deductible expense for employers. Where employers have not directly paid for all or part of an employee’s transportation expenses, employees have had the option to pay for certain qualifying expenses on a pre-tax basis through a qualified transportation plan offered by the employer. Tax reform changes how these benefits are managed because effective for tax years on or after 2017 (this means 1/1/18, unless your company operates on a tax year other than the calendar year), transportation expenses are no longer deductible for the employer. Employers can still pay for these benefits; they just cannot deduct the cost. For those worried about the deduction, a simple workaround is to pay employees the cost of these benefits as wages and then let them pay for them directly on a pre-tax basis through a transportation plan.
For employers who regularly ask employees to relocate for work or hire employees from other parts of the country, another important aspect of tax reform is the bill’s treatment of moving expenses. Starting in 2018 and continuing for eight years, most employees will lose the ability to exclude moving expenses from income or deduct moving expenses. Exceptions exist for certain members of the Armed Forces. Employers that maintain a qualified plan to address moving expenses may want to have that plan reviewed and adjusted to ensure that employees understand the current treatment of moving expenses.
Other Fringe Benefits
Tax reform eliminates in full or part several other deductions related to fringe benefits offered to employees. In particular, beginning with an employer’s first tax year after 2017, the special exception that allowed employers to deduct certain meal expenses at a 100 percent level is eliminated (50 percent remains deductible). In addition, the partial deduction for certain work-related entertainment has been eliminated, and stricter limits now exist related to the deductibility of employee-achievement awards.
To the relief of many, tax reform left 401(k)s and other retirement plans largely unchanged. However, the bill does include some adjustments. In particular, when a participant severs employment with an employer, and that participant has a retirement loan outstanding, the participant used to have to pay off the loan within 60 days or face tax penalties. New rules allow a participant until the due date (including extensions) for a participant’s tax return for a given year to make payment. Loan documentation should be updated to reflect these new rules.
Tax Credit for Employers that Offer Paid FMLA Leave
Beginning in tax years after 2017, employers that opt to pay at least 50 percent of an employee’s wages for at least two weeks of FMLA leave are eligible for a tax credit of 12.5 percent of the wages actually paid. Where employers pay for more than 50 percent of wages, the tax credit rate can increase to as much as 25 percent. The tax credit is available for wages paid up to 12 weeks and is limited to leave taken under FMLA.
Iris Tilley, partner at Barran Liebman LLP, advises employers in all aspects of employment law, from advice and litigation to the design, administration, and termination of qualified retirement plans, non-qualified deferred compensation arrangements, and health and welfare plans.