This is the fourth issue in a planned series of alerts designed to provide an in-depth analysis on topics related to tax reform. This Tax Reform Management Alert issue focuses on executive compensation and employee benefits aspects of the tax reform proposals and how they will impact your business.
On Wednesday, December 20, 2017, Congress passed The Tax Cuts and Jobs Act (Bill). The Senate passed the Bill by a 51 to 48 vote along party lines at about 1 a.m. Wednesday. The House passed the Bill by a vote of 224 to 201 later in the day on Wednesday. (The House had to re-vote due to a technical snafu with their first vote.)
What Happens Next?
President Trump is expected to sign the Bill although, as of the time and date of this Alert, his schedule for doing so is unclear. While the Bill will almost certainly become law and will dramatically reshape the business and individual tax landscape in the United States, the vast majority of the individual tax changes expire in 10 years; however, the corporate rate reduction is permanent. As noted above, the Bill was passed along party lines and, as a result, expect to see efforts to change the law as soon as politics permit it.
As we’ve previously reported, the Bill’s impact on employee benefits and executive compensation were greatly diminished as the Bill wound its way through Congress (see our previous alerts, Issue #1, Issue #2 and Issue #3). Nonetheless, the Bill does make some important and material changes in this area. The following table updates our prior summaries by providing the highlights of the final Bill, as compared to the earlier versions of the House Bill and Senate Bill.
|ISSUE||HOUSE BILL, AS PASSED||SENATE BILL, AS PASSED||RECONCILED BILL|
|Right to Defer Stock (Private Companies)||Effective for stock attributable to options exercised or RSUs settled after December 31, 2017
|Section 162(m) $1 million Deductibility Limit||Effective tax years beginning after 2017 with no grandfather or transition period
Effective tax years beginning after 2017 with limited grandfather
Effective tax years beginning after 2017 with limited grandfather
|New Tax on Excess Compensation Paid by Not-for-Profits||Beginning 2018, a new tax is imposed on excess compensation paid by a tax exempt employer:
||Same, except compensation is treated as paid, and therefore subject to the excise tax, when no longer subject to a substantial risk of forfeiture||Adopts Senate version, except:
|Repeal of Deduction for Common Executive Perks||Eliminate employer deduction for entertainment expenses, membership dues and other common perquisites, unless the individual pays tax on these benefits, effective for expenses incurred after 2017||More limited changes to current law||Adopts Senate version. No employer deduction is allowed for expenses paid or incurred after 2017 with respect to (1) an activity generally considered to be entertainment, amusement or recreation, (2) membership dues with respect to any club organized for business, pleasure, recreation or other social purposes, or (3) a facility or portion thereof used in connection with any of the above items. Employers may still generally deduct 50 percent of food and beverage expenses associated with operating their trade or business (e.g., meals consumed by employees on work travel).|
|Employer-Provided Housing||Beginning in 2018, the exclusion for housing under IRC 119 will be limited to $50,000 ($25,000 for a married individual filing a joint return) and will phase out for highly compensated individuals||No change to current law||No change to current law|
|Moving Expenses||Eliminate employer deduction for moving expenses incurred after 2017 and the exclusion from income for qualifying moving expense reimbursements made after 2017||Same, except deduction and exclusion will remain for certain members of the armed forces on active duty (provision sunsets after 2025)||Adopts Senate version|
1. Generally, an excluded employee is (1) the CEO, CFO (or individual acting in either capacity), (2) family member of CEO or CFO, (3) an employee who has been one of the four highest compensated officers for the corporation for any of the 10 preceding taxable years, or (4) a 1% owner of the corporation at any time during the 10 preceding taxable years.
2. If deferred, the deferred income is taxed upon the earliest of (1) the first date the qualified stock becomes transferable, including to the employer, (2) the date the employee first becomes an excluded employee, (3) the date the stock becomes readily tradeable on an established securities market, (4) the date five years after the first date the employee’s right to the stock becomes transferable or is not subject to a substantial risk of forfeiture, whichever is earlier (the Senate version simply provides the date that is five years after the first date the right to the stock becomes substantially vested), or (5) the date the employee revokes the deferral election.
|ISSUE||HOUSE BILL, AS PASSED||SENATE PROPOSAL||RECONCILED BILL|
|Individual Mandate||No change to current law||Reduces penalty for individual mandate to $0, beginning in 2019||Adopts Senate version|
|Medical expense deduction (individuals may deduct unreimbursed medical expenses that exceed 10% of AGI)||Repeals deduction entirely||The medical expense deduction would be retained, but in the following amounts:
||Adopts Senate version|
|Archer Medicals Savings Accounts (MSAs)||Eliminates deduction for contributions to Archer MSAs but permits rollover to Health Savings Accounts (HSAs)||No change to current law||No change to current law|
|Qualified Transportation Fringe Benefit||Eliminates deductions for transportation fringe benefit||Eliminates deductions for transportation fringe benefit.||Adopts Senate version, effective for amounts paid or incurred after 2017|
|Qualified Bicycle Reimbursement||No change to current law||Repeals qualified bicycle exclusion (provision sunsets after 2025)||Adopts Senate version|
|Dependent Care Assistance Programs||Exclusion repealed beginning in 2023||No change to current law||No change to current law|
|Adoption Assistance Program||Exclusion repealed beginning in 2018||No change to current law||No change to current law|
|Educational Assistance||Repeals tax exclusion under Code Section 127 (but not under Code Section 132(d)) for certain employer reimbursements of education-related expenses||No change to current law||No change to current law|
||SENATE PROPOSAL||RECONCILED BILL|
|Loans||Following a plan termination or separation from service, allows participants to rollover a qualified plan loan offset amount to an eligible retirement plan by the due date (including extensions) of the participant’s federal income tax return for the year in which the offset occurs, thereby avoiding taxation on the offset amount||Same, except substitutes “severance from employment” for “separation from service”||Adopts Senate version|
|In-Service Distributions||Age for in-service distributions from governmental plans lowered to earlier of normal retirement date or age 59 1/2||No change to current law||No change to current law|
|Frozen DB Plans||Frozen pension plans allowed to protect grandfathered benefits as long as grandfathered group not modified in a discriminatory manner after plan is closed to new hires||No change to current law||No change to current law|
|Disaster Rlelief||No change to current law||Provides relief for certain retirement plan (and IRA) distributions taken on or after 1/1/16 and before 1/1/18, by individuals residing in a presidentially declared disaster area who have suffered economic loss by reason of the disaster||Adopts Senate version|