On December 22, 2017, President Trump signed into law a tax bill reconciling both the House and Senate versions of the so-called Tax Cuts and Jobs Act. The Act’s major provisions are lowering the corporate tax rate to 21% effective in 2018, and repealing the individual mandate under the Affordable Care Act beginning January 1, 2019. The Act does not affect employer reporting responsibilities under the Affordable Care Act. Several provisions of the bill will affect fringe benefits, employee benefits plans, and executive compensation arrangements. Many of these provisions are effective January 1, 2018. Below is a high-level summary of major provisions that could impact plan design and administration:
1. Publicly traded companies may no longer rely on the performance-based compensation or commission exceptions to the $1 million deductibility limit under Section 162(m). There is a transition rule for remuneration provided pursuant to a written binding contract in effect on November 2, 2017 and not materially modified after that date. The Act also provides that an executive once identified as a covered employee remains a covered employee for all future years.
2. Tax-exempt organizations will be subject to a 21% excise tax on remuneration in excess of $1 million paid to any of its five highest paid employees, with some exceptions.
3. Employees whose plans terminate or who have a severance from employment while holding an outstanding 401(k) plan loan now have until their tax filing deadline to roll over outstanding loan balances to an IRA to avoid the loan being treated as a taxable distribution.
4. Employers can no longer deduct expenses that are qualified transportation and parking fringe benefits. In addition, tax-exempt entities must treat the funds used to pay for these benefits as unrelated business taxable income (potentially subject to income tax). Employees can still treat the receipt of these fringe benefits as exempt from income.
5. Certain employees of private business corporations that award stock options or restricted stock units (RSUs) to a broad-based group of employees may be able to file an election to defer recognition of income for up to five years from when the shares become vested. In order to be eligible, the corporation must have a plan under which at least 80% of its employees are granted options or RSUs. Employers are also required to give notice to employees of their right to make the deferral election. Failure to give the notice may result in a penalty of $100 per failure, up to a maximum of $50,000 per year. Given the restrictions, it is expected that this provision will generally be used only by start-up companies.
6. Business entertainment expenses, other than certain meal expenses, are now entirely nondeductible even if directly related to or associated with the business unless one of certain already established exceptions applies.
7. Both the employee’s exclusion from gross income for qualified moving expense reimbursements and the deduction for moving expenses are suspended until January 1, 2026.