Final Tax Reform Law: Impact on Employee Benefits
On December 20, 2017, the Senate and House of Representatives passed H.R. 1, more commonly known as the Tax Reform Bill. President Trump signed H.R. 1, the “Tax Cuts and Jobs Act,” (the “Act”) into Law on December 22, 2017. Employers should pay close attention to provisions in the Act that impact employee benefits, as there may be financial consequences to both employers and employees. Many of the provisions in the Act took effect January 1, 2018; however, the changes to the Individual Mandate Penalty take effect January 1, 2019. This article highlights some of the key changes in the Act affecting employee benefits.
The Affordable Care Act (“ACA”) Individual Mandate Penalty (Effective 1/1/19)
Current Law: The ACA imposes a penalty tax on individuals for any calendar month in which they do not have health insurance coverage providing “minimum essential coverage.”
Change under the Act: Effective January 1, 2019, the individual mandate penalty will be set at zero dollars.
Important Note for Employers: The Act does not repeal the ACA, or its related taxes. Applicable Large Employers (“ALEs”) may still be assessed penalties under Code Section 4980H(a) for failure to offer full-time employees minimum essential coverage and under Code Section 4980H(b) for failure to offer coverage that is affordable and provides minimum value. ALEs also remain subject to the ACA reporting requirements.
Practical Pointer: Employers may see an increase in employees waiving coverage as a result of hearing inaccurate news that the individual mandate has been eliminated. Employers may want to educate employees during open enrollment that they may face an individual mandate penalty for not having minimal essential coverage during the 2018 calendar year.
Qualified Transportation Fringe Benefits (Effective 1/1/18)
Prior Law: Employers were permitted to establish qualified transportation benefit plans for employees. Employers received a business deduction for such plans and employees were allowed to deduct pre-tax dollars for qualified transportation expenses. For 2017, IRS limits permitted employees to use pre-tax dollars and employers to deduct their contributions of:
- $255 per employee, per month in transportation expenses;
- $255 per employee, per month in parking expenses; and
- $20 per employee, per month for biking-related expenses.
For 2018, the IRS set the tax-excludable limit for both transportation and parking expenses at $260 per month and $20 for biking expenses.
Changes under the Act Impacting Employers: Effective January 1, 2018, employers lose the business deduction for offering employer-sponsored pre-tax qualified transportation fringe benefits, unless necessary for the safety of an employee. Tax-exempt entities will have their unrelated business taxable income increased for the value of providing qualified transportation fringe benefits to employees.
Changes under the Act Impacting Employees: Employees retain the tax exclusion for qualified transportation fringe benefits with the exception of the exclusion for qualified bicycle commuting reimbursements, which is suspended and unavailable to employees from January 1, 2018 through December 31, 2025. Employer reimbursements for bicycle commuting expenses during this time will be taxable and subject to payroll taxes and income tax withholding.
Other Fringe Benefits Impacted
Effective January 1, 2018, the Act includes the following changes impacting other fringe benefits:
- Qualified Moving Expenses. Both the business deduction and exclusion from taxable income for recipients of employer-paid moving expenses for tax years 2018 through 2025 are suspended, with an exception for certain active-duty members of the armed forces. Any job-related moving expenses paid for by the individual and not reimbursed by an employer will not be tax deductible.
- Employee Achievement Awards. Employees may only receive tangible personal property pre-approved by the employer as an achievement award. Cash, cash equivalents (gift cards or gift certificates), vacations, meals, lodging, theater or sporting tickets, stocks, bonds, and other similar items are not tangible personal property.
- Onsite Gyms. Employers lose the business deduction for providing onsite gyms. Employees will not be taxed on the value of the benefit.
- Meals, Food, and Beverages. For tax years 2018 through 2025, the 50 percent deduction limitation will continue to apply to meal expenses for the convenience of the employer, and will now apply to expenses related to the operation of an eating facility for employees, as a de minimus fringe benefit. Effective January 1, 2026, employers lose all business deduction for meals, food, and beverage expenses including expenses related to the operation of an eating facility for employees. Employees will not be taxed on the value of the benefit.
Temporary Employer Credit for Paid Family and Medical Leave
The Act implements a new general business credit for eligible employers in 2018 and 2019. To be eligible for the business credit, the employer must have a written program that (1) pays at least 50% of wages normally paid to a qualified employee, (2) allows all qualifying full-time employees not less than two weeks of annual paid family and medical leave, and (3) allows qualifying less-than-full-time employees a commensurate amount of leave on a pro-rata basis. Employer-provided paid leave such as vacation leave, personal leave, or other medical or sick leave, is not considered to be family and medical leave for purposes of this business credit.
A “qualifying” employee is an employee who has been employed by the employer for one year or more, and who, for the preceding year, had compensation not in excess of 60% of the compensation threshold for highly compensated employees ($120,000 in 2018).
If an employer pays 50% of wages, the employer can claim a general business credit equal to 12.5% of the wages paid to a qualifying employee for up to 12 weeks of family and medical leave a year. The credit increases by 0.25% for each percentage point by which the rate of payment for a qualifying employee on family and medical leave exceeds 50% of the employee’s wages (but not to exceed 25% of the wages paid).
Employers need to evaluate the financial impact of the changes under the Act to their employee benefit programs and bottom line. Employers should consult with their CPA as soon as possible to understand what, if any, tax impact the Act will have on the employer. Employers should also consult with their payroll administrator to determine whether any system changes are necessary to ensure proper tax treatment of employee benefit programs impacted by the Act.
The content herein is provided for educational and informational purposes only and does not contain tax or legal advice. Please contact our office if you have any questions about the tax reform Act or its impact on your employee benefit plans.
Dated: January 22, 2018