On Friday, December 22, 2017, President Trump signed the 1,100-page tax bill into law. Although not as drastic as the original House proposal, the bill promises to bring about the most impactful tax reform that plan sponsors and their advisors have seen in decades. This advisory highlights the key tax changes to benefits that every employer should be aware of.
Although certain fringe benefits – including qualified educational assistance program, adoption assistance, and dependent care assistance – were untouched by the tax bill, the bill both affects the employer deduction for certain fringe benefits and changes the tax treatment of others. As a result, employers are likely to revisit some of their benefit offerings.
How did the tax treatment of fringe benefits change?
Effective January 1, 2018, (and through at least January 1, 2026) the bill changes or eliminates employer deductions for the following employee benefits:
- Qualified transportation fringe benefits (e.g., parking, mass transit passes, van pooling), including benefits provided through direct payment, reimbursement, or salary reduction arrangements, are no longer deductible unless required for employee safety.
- Qualified moving expense reimbursements are no longer deductible (unless paid to members of the U.S. Armed Forces).
- Business-related entertainment expenses, including membership dues with respect to any club organized for business, pleasure, recreation or other social purposes, are no longer deductible.
- Food or beverage expenses that are related to the employer’s business are subject to a 50 percent cap on deductions.
- Onsite gyms are no longer deducible.
- New Code Section 162(f) prohibits employers from deducting settlement payments to the government, subject to exceptions for payments that are attributable to restitution or compliance.
- New Code Section 162(q) prohibits employers from deducting settlement payments in a sexual harassment or sexual abuse settlement if the settlement or payment is subject to a nondisclosure agreement.
The tax bill also changes the individual tax treatment of certain fringe benefits:
- Bicycle commuting reimbursements are no longer tax free.
- Qualified moving expense reimbursements are no longer tax free.
- Unreimbursed employee business expenses may no longer be itemized and deducted.
What does this mean?
Although the tax bill is clear with respect to what benefits it impacts, the bill also creates a number of questions about the practical consequences of these changes. While we wait for additional guidance, employers and their legal counsel must address questions such as how to coordinate their transportation fringe benefits with Code Section 132(f) salary deferral plans, how to determine the fair market value of a transit pass, and how to tax moving expenses incurred in 2017, but reimbursed in 2018. In addition, because the bill treats nondeductible fringe benefits offered to employees as unrelated business taxable income (UBTI), tax-exempt organizations are encouraged to review their budget, UBTI planning, and compensation decisions.
Is it all bad news for employer-offered benefits?
The tax bill eliminated or decreased preferential tax treatment for a number of employee benefits. But it’s not all bad news. In addition to lowering the corporate tax rates, the tax bill also provided employers with the following reprieves.
Paid Leave Credit for Employers
Beginning in 2018, the bill puts in place a federal tax credit for employers that provide at least two weeks of paid leave at a rate of at least 50 percent of regular wages to qualifying employees on leave under the Family and Medical Leave Act. The credit applies toward workers who earn below $72,000 per year and will range from 12.5 percent to 25 percent of the cost of each hour of paid leave. Employers should, therefore, work with legal counsel to structure their paid leave policy to both comply with state or local laws and qualify for the FMLA credit.
401(k) Loan Extension The news related to 401(k) plans is largely that they remain unchanged. However, the tax bill also provides for additional flexibility to employees by extending the period for rollovers on 401(k) plan loans. In the past, if an employee left his job, he had only 60 days to repay the loan or face income taxes and a 10 percent early withdrawal penalty. Under the new bill, employees will generally have until October of the following year to repay the loan or roll over into an IRA or the 401(k) at a new employer.
In short, the tax bill has sweeping impacts on employee benefits, including common perks generally offered to incentivize and retain employees. Employers should, therefore, revisit the desirability and effectiveness of their benefits and ensure that existing policies and operations are updated to reflect the tax changes.