On December 22, 2017, President Trump signed the Tax Cuts and Jobs Act into law. The Act includes many changes for employers, including a tax credit for providing paid family and medical leave, elimination of a business expense deduction related to nondisclosure agreements in sexual harassment settlements, and changes to the tax treatment of certain employer-provided fringe benefits, among others. Employers should promptly consult with their employment attorneys and tax advisors to determine whether and when any internal changes should be made due to passage of the Act.
Tax Penalty for Non-Disclosure Agreements
When settling claims of sexual abuse or harassment, businesses often condition payment of a settlement amount on the individual’s execution of a non-disclosure agreement. The Tax Cuts and Jobs Act seeks to discourage use of NDAs in sexual harassment settlements by prohibiting the tax deduction of any settlement or payment related to sexual harassment or sexual abuse, if such settlement or payment is subject to a nondisclosure agreement, and attorney’s fees related to such a settlement or payment.
How this new provision will work when sexual harassment/abuse claims are mixed with other types of claims remains to be seen. As a result of this change, employers must be cognizant of the potential tax implications of entering into NDAs with respect to settlement of sexual harassment and/or sexual abuse claims, and weigh the costs and benefits of using an NDA.
Tax Subsidy for Paid FMLA Leave
The federal Family and Medical Leave Act (FMLA) currently requires certain employers to provide eligible employees with up to 12 weeks of leave per year for specified family and medical reasons. FMLA leave can be paid or unpaid. The Tax Cuts and Jobs Act seeks to encourage employers to provide paid leave by providing employers with a tax credit for family and medical leave wages paid by the employer to qualifying employees.
Under the Act, qualifying employers will be allowed to claim a credit of 12.5 percent of the amount of family and medical leave wages paid to a qualifying employee, if the compensation to the employee while on family and medical leave is 50 percent of the employee’s normal wages. The credit increases from 12.5 percent by 0.25 percent for each percentage point by which the rate of compensation exceeds 50 percent of the employee’s normal wages, up to a maximum credit of 25 percent. The maximum amount of family and medical leave that may be taken into account is 12 weeks. In order to be eligible for the credit, employers will need to have written policies that meet various requirements set forth in the Act.
Some employers provide paid-time-off (PTO) for FMLA-permitted and non-FMLA absences, and other employers allow paid Short-Term Disability (STD) benefits to provide pay for what might otherwise be unpaid FMLA leave, while those in Chicago, New York, Seattle, and other jurisdictions have ordinances that provide paid sick leave for FMLA-permitted purposes. Some or all of these scenarios may allow for the tax credit, but employers must draft such policies carefully.
The credit is set to expire December 31, 2019, but may be revisited by legislators prior to expiration.
Transportation and Meal Expenses
Under the Tax Cuts and Jobs Act, employers will no longer be able to deduct amounts incurred or paid for qualified transportation fringe benefits (e.g., parking, transit, and vanpooling).
The Act also eliminates the deduction for expenses related to employee meals. However, the Act expands the 50 percent limit to de minimis fringe benefits to onsite eating facilities until December 31, 2025. Afterward, employer costs for providing food and beverages to employees through an onsite facility are not deductible.
Employee Achievement Awards
Prior to enactment of the Tax Cuts and Jobs Act, an employer could deduct up to $400 for the cost of an “employee achievement award” given to any one employee annually. IRS regulations define employee achievement award to include length-of-service awards, safety awards and awards given during meaningful presentations.
Under the Act, achievement awards of tangible personal property may still be treated as deductible by the employer. However, what constitutes tangible personal property is now defined to exclude cash, cash equivalents, gift cards, gift coupons or gift certificates (other than arrangements conferring only the right to select and receive tangible personal property from a limited array of such items pre-selected or pre-approved by the employer), or vacations, meals, lodging, tickets to theater or sporting events, stocks, bonds, other securities and other similar items.
Employee Moving Expenses
The Tax Cuts and Jobs Act suspends the deduction for employee moving expenses that are paid for or reimbursed by the employer from years 2018 through 2025. There is an exception for active duty members of Armed Forces. Moving expenses were once a common perk for transferring executives, but this new provision may end such relocation incentive.
On-Site Athletic Facilities
The Act disallows deductions for any on-premises athletic facility, requiring employers to pay unrelated business income tax for the provision of this fringe benefit.