The federal Tax Cuts and Jobs Act, which took effect at the start of 2018, may affect medical practices and health organizations in a number of ways. In this post, we focus on what the new law might mean for compensation arrangements.
Employees and prospects who have outstanding 401(k) loans have more time to roll them over following a termination of employment or plan termination (until the due date of their personal income tax return). This may make it easier for a practice’s 401(k) plan to distribute the accounts of terminating employees, saving on costs, and it could make it easier to recruit prospects (e.g., nurses) who are no longer faced with an immediate tax hit if they leave their prior employer (and its 401(k) plan).
Several fringe benefits have become taxable to a practice’s employees and/or nondeductible by their business:
- Employer payments or reimbursements for relocation expenses of new employees are now taxed and nondeductible.
- The types of nontaxable and deductible achievement awards a practice can give to employees (e.g., for service or safety) have been narrowed to exclude cash, gift cards/certificates, vacation, and tickets to theatre or sporting events, but the dollar value limit has increased to $1,600 per year.
- A practice’s ability to deduct meals that they provide on-site to employees has been replaced with the 50% business-related meals deduction.
- Tickets to sporting events and concerts are no longer deductible as a business-related expense.
- Employer-paid transportation costs, such as bus passes or paid parking, are no longer deductible by a practice, although they continue to be a tax-free benefit for employees.
- If a practice has been providing a bicycle commuting benefit, it is no longer deductible and is now taxable to the employee. On-site gyms are still a tax-free benefit to employees, but employers can no longer deduct the cost.
Practices should review and update policies and payroll systems to properly reflect these new rules. If a practice’s office lease includes parking spots or gym access, it should discuss the continued deductibility of lease payments with their accountant or other tax professional.
New tax credits are available if a practice provides paid (or partially paid) leave. If a practice pays at least 50% of the pay of employees on qualifying family and medical leave, they may be able to get a tax credit of up to 12.5%-25% of those payments. Paid leave may be a valuable recruiting or retention tool for which practices can offset some of the costs.
Settling Sexual Harassment Claims:
In response to recent sexual harassment claims in the news, the new tax law disallows a deduction for amounts paid to settle a sexual harassment or abuse claim if the settlement includes a nondisclosure agreement. Since this could affect the typical general release of claims that is required as part of most severance arrangements, practices should consider whether their employment or separation agreements need to be revised.
Finally, for tax-exempt organizations, there is now a $1 million cap on total annual compensation paid to anyone who is or has ever been (since 2018) one of five highest paid executives. In addition, practices cannot pay severance to anyone in this executive group that equals or exceeds three times his or her average base compensation. If either of these limits is exceeded, the business could face a 21% excise tax (subject to possible increase in future years). There are special exceptions available for certain medical professionals, if the payments qualify. Practices should review their various compensation arrangements, including deferred compensation provided through plans or shareholder agreements, to determine whether they provide payments that might trigger this excise tax and how they might be able to restructure those payments. Practices should also note that tax-exempt organizations that provide certain of the fringe benefits described above could now trigger an unrelated business income tax (“UBIT”) to the organization. Again, we recommend that practices discuss these rules with their accountant or other tax professional.
The new tax law offers some new opportunities that may be useful to practices as they strive to recruit and/or retain employees. However, a failure to react to changes brought about by the law can also result in costly lost deductions or UBIT to the business, or additional taxes to employees. Now is the time for practices to review compensation practices with their advisors and determine if changes are needed.
Disclaimer: Of necessity, this post is written in very general terms, which means it is not a substitute for legal advice aimed at a particular practice group’s situation. It is also not intended to create an attorney-client relationship.