The Tax Cuts and Jobs Act makes some notable, though targeted, changes to the employee benefits landscape. We summarize some of the more significant changes in the Question and Answers set out below.
How will the Act’s repeal of the Affordable Care Act individual mandate affect employers?
Commencing in 2019, the Act eliminates the tax penalty under the Affordable Care Act’s individual mandate—i.e., the ACA provision that require U.S. citizens and green card holders to have “minimum creditable coverage”. The effect of this change is to repeal the ACA’s individual mandate. Importantly, however, the employer shared responsibility rules remain in place, which means that employers must still offer coverage or face the prospect of an excise penalty. Employers will continue to be required to prepare, distribute and file Forms 1094-C and 1095-C.
There is a secondary impact of the repeal of the individual mandate on employers: since employers will need to offer coverage, but employees will not be required to have coverage, younger and healthier employees can be expected to exit the risk pool. This could make employer plans more expensive to maintain.
What changes does the Act make to Qualified Transportation Benefits and Qualified Bicycle Commuting Reimbursements?
Prior law provided an exclusion from gross income for qualified transportation fringe benefits, which are defined (in Code section 132(f)(1)) to include “transportation in a commuter highway vehicle if such transportation is in connection with travel between the employee’s residence and place of employment,” transit passes, qualified parking expenses and “qualified bicycle commuting reimbursement” costs. Nor was any amount included in an employee’s gross income because he or she had a choice among qualified transportation fringes (other than a qualified bicycle commuting reimbursement).
Beginning in 2018, the Act repeals the prior law employer deduction for qualified mass transit and parking benefits, except as necessary for ensuring the safety of an employee. The Act also repeals the exclusion from gross income and wages for qualified bicycle commuting reimbursements, effective for tax years beginning after December 31, 2017, and before January 1, 2026. During this period, employer reimbursements for bicycle commuting expenses will be subject to income tax but not wage withholding.
Congress eliminated the employer deduction for mass transit and parking benefits by amending Code section 274. No change was made to Code section 132. As a result, the Act does not affect the ability of employees to deduct mass-transit and parking benefits, which employees can continue to purchase with elective deferrals of salary. This treatment does not extend to qualified bicycling commuter reimbursements, since these benefits cannot be purchased with salary reduction contributions. Presumably Congress thought that the loss of the employer deduction would be offset by lower marginal tax rates on corporations.
Does the Act do anything to help victims of natural disasters?
It does. Distributions from IRAs and qualified plans and tax-sheltered annuity arrangements, among others (collectively referred to as “eligible retirement plans”) are generally taxed in the year in which they are distributed. Distributions received before age 59½ are subject to an additional 10% “early withdrawal penalty.” The tax on distribution can be further deferred if the distribution is rolled over to another eligible retirement plan within 60 days.
The Act provides relief from the early withdrawal penalty for up to $100,000 of “qualified 2016 disaster distributions,” which the Act defines as distributions from an eligible retirement plan made on or after January 1, 2016, and before January 1, 2018, to an individual whose principal place of abode at any time during calendar year 2016 was located in a 2016 disaster area and who has sustained an economic loss by reason of the events that gave rise to the Presidential disaster declaration. Rather than being taxed currently, qualified 2016 disaster distributions are taxed ratably over three years, and the amount of the distribution can be recontributed to an eligible retirement plan within three years. The Act allows plans to be amended retroactively to take advantage of these rules. This provision of the Act—in particular the relief from early withdrawal penalties—will be particularly welcome news to affected employers and employees.
How does the Act change the rules governing plan loans from a qualified retirement plan (e.g., a 401(k) plan)?
Before the Act, an employee who terminated employment with an outstanding plan loan could avoid having the outstanding load balance taxed to him or her if he or she rolled over the amount of the loan to an IRA or eligible retirement plan within 60 days. The Act enlarges this time period to the due date for filing the employee’s tax return for that year (including extensions).
This provision applies to employees whose plans terminate or who separate from service while having a plan loan outstanding after December 31, 2017. While this change may not affect a large number of employees, it is nevertheless welcome relief.
Does the Act affect the deduction for meals and entertainment, and if so how?
Yes. The Act repeals most of the rules governing deductions for entertainment, amusement, or recreation that was directly related to or associated with the active conduct of the taxpayer’s trade or business. The new rule applies to amounts incurred or paid after December 31, 2017.
The Act retains the 50 percent deduction for business-related food and beverage expenses, which it expands to include food and beverages provided to employees through an eating facility that meets the requirements for de minimis fringe benefits. These latter rules apply to amounts incurred or paid after December 31, 2017 and before January 1, 2026.
The survival of the 50 percent deduction for meals is welcome by businesses of all sizes. Similarly, employers that already maintain employee eating facilities will welcome the new tax break. The extent to which the newly expanded rules governing eating facilities will cause employers to offer this as a new benefit is less clear.
Did moving expenses survive under the Act?
The tax code has historically provided for the deduction of moving expenses, which the Act reverses, with a limited exception for members of the U.S. Armed Forces on active duty who move pursuant to a military order. The new rules take effect in 2018 and sunset in 2025.
What are some of the provisions that were excluded from the Act, and will therefore not become law at this time?
There are a handful of items that did not make it into the Act and are worthy of note:
- Employers that sponsor frozen defined benefit plans have long struggled with the application of the tax non-discrimination rules. As these plans continue to operate, they tend to accumulate higher paid, long service employees, making it increasingly difficult to pass non-discrimination testing due, not as a result of benefit accruals, but rather as a consequence of changing plan demographics. The House bill would have granted some relief, by allowing employers greater latitude in meeting these nondiscrimination requirements.
- The House bill would have allowed employees to take hardship distributions from a 401(k) that included account earnings and employer contributions, rather than just employee contributions.
- Similarly, the House bill would have required the IRS to amend its regulations that bar an employee from making elective deferrals to a 401(k) plan for six months after receiving a hardship distribution
These provisions, among others, were eliminated in the Conference Committee.
Typically, when Congress or a regulatory agency changes the rules governing employee benefits, employers are provided some time to react. For example, tax-qualified retirement plans (including 401(k) plans) have available to them a generous “remedial amendment period” that in the case of the changes made by the Act give them ample time to make the necessary amendments. This is not the case, however, in the case of qualified transportation fringe benefits, with respect to which the changes take effect on January 1. The issue is particularly urgent for employers in some jurisdictions that require employers to offer transportation fringe benefits.