On December 22, President Donald Trump signed into law H.R. 1 (the Act), which makes widespread changes to the Internal Revenue Code. The Act makes several changes to the rules governing retirement plans, welfare plans and certain employer-provided fringe benefits. We have summarized below the material employee benefit and fringe benefit provisions of the Act. These provisions will require or permit many employers to amend their benefit plans and fringe benefit programs; such amendments will need to be communicated to affected employees.
Qualified Retirement Plans
The Act makes changes to the permitted treatment of 401(k) plan loans. Most 401(k) plans provide that, upon separation from service, a participant’s obligation to repay a plan loan will be accelerated. If the loan is not repaid, the participant’s account balance will be offset by the amount of the unpaid loan. The offset will be treated as a distribution from the plan, which triggers current income taxation (and, in most cases, a 10 percent early withdrawal penalty). Alternatively, under preexisting law, the offset amount could instead be treated as a direct rollover if, within 60 days, the participant pays an amount equal to the loan offset to an IRA or other eligible retirement plan.
Under the Act, the 60-day period to complete the direct rollover of a loan offset is extended to the due date (including extensions) for filing the participant’s federal income tax return for the year of the offset. This change provides an extended opportunity for individuals to avoid early distribution penalties and a permanent reduction to their tax-sheltered retirement savings. The above-described treatment under the Act is only available to plan loan offsets arising from a participant’s failure to repay the loan due to separation from service or plan termination.
This change will take effect for 2018 and later years. Employers may need to revise their loan procedures and/or participant communications to reflect this change.
Individuals making an IRA (traditional or Roth) contribution for a taxable year are permitted to convert the contribution as a contribution to the other type of IRA and later recharacterize the contribution back to a Roth IRA, so long as the conversion and recharacterization are completed before the due date for the individual’s income tax return for that year. However, under the Act, conversion from a traditional IRA to a Roth IRA and later recharacterization back to a traditional IRA will no longer be permitted. Thus, recharacterization will not able to be used to unwind a Roth conversion.
This change will take effect for 2018 and later years. Administrators of IRA accounts must take notice of this change.
The Act repeals the individual mandate under the Affordable Care Act (ACA). The ACA currently provides that individuals must be covered by a health plan that provides a minimum level of coverage or be subject to a tax. The Act reduces the amount of the individual responsibility payment to zero. Accordingly, individuals without coverage, or with coverage that does not meet the minimum standard, will not be subject to the tax.
This change will take effect for 2019 and later years.
The Act also makes a number of changes related to fringe benefits, including the following:
- Providing an employer credit for paid family and medical leave. For tax years 2018 and 2019, employers can claim a limited tax credit for wages paid to employees during any period in which the employee is on paid FMLA leave.
- Repealing the exclusion of employer-paid (or employer-reimbursed) moving expenses from an employee’s gross income for income and employment tax purposes. Employer-paid (or reimbursed) moving expenses — other than for members of the U.S. armed forces — will be taxable income to employees. This change will be effective for 2018 and later years.
- Eliminating the business deduction for qualified mass transit and parking benefits, except as necessary for ensuring the safety of an employee. For 2018 and later taxable years, mass-transit and parking benefits will continue to be tax exempt to employees, who can pay their own mass transit or workplace parking costs using pretax income through an employer-sponsored salary-deduction program. However, the employer’s business deduction for qualified mass-transit and parking benefits is eliminated, except as necessary for ensuring the safety of an employee. Tax-exempt employers will also be subject to the tax on unrelated business income for any qualified transportation benefits provided to employees.
The biking benefit is slightly different. The Act suspends the exclusion from gross income and wages for qualified bicycle commuting reimbursements for taxable years beginning after December 31, 2017 and before January 1, 2026. This means that employer reimbursements for bicycle commuting expenses are taxable and subject to payroll taxes and income tax withholding.
Employers considering changes to their qualified transportation fringe benefit programs should take into account local laws or ordinances and any penalties or concerns regarding noncompliance with those laws. For example, New York City’s Affordable Transit Act (Local Law 53) requires employers in New York City with 20 or more full-time employees to provide pretax transit benefits to their full-time employees. Similar laws in Washington D.C., and adopted by certain municipalities in the California Bay Area, require certain employers in those jurisdictions to offer employees commuter benefits.