In an effort to stimulate economic growth, the Tax Cuts and Jobs Act (Act) cut corporate tax rates from 35 to 21 percent, effective for tax years beginning after December 31, 2017. However, in order to avoid further increasing the federal deficit, the Act includes several revenue-raising measures aimed at countering the loss of corporate tax revenue. While it had long been speculated in the employee benefits arena that such revenue-raising measures would come in the form of retirement plan reform, namely the loss of traditional pretax deferrals in favor of Roth contributions, 401(k) plans came away intact. Instead, employer provided fringe benefits ultimately proved to be targets for change.
Transportation Fringe Benefits
Under previous tax law, employers could provide “qualified transportation fringe” benefits tax-free to employees and deduct the expense of doing so. Common examples of “qualified transportation fringes” include qualified parking, transit passes, commuter highway vehicle transportation and qualified bicycle commuting reimbursement. Under the Act, tax-free qualified bicycle commuting reimbursements are suspended until 2026, and while employers can continue to provide the remaining qualified transportation fringe benefits tax-free under Section 132(f) of the Internal Revenue Code, the expense of providing these benefits to employees is no longer deductible by an employer after 2017. Therefore, in 2018, while employers can continue to provide employees with qualified parking and transit benefits of up to $260 per month tax-free, employers cannot take a deduction for these expenses. However, if an employer chooses to include a qualified transportation fringe benefit in an employee’s income, the employer may deduct the expense of providing the benefit.
Prior to enactment of the Act, an individual who incurred moving expenses in connection with beginning employment at a new place of business at least 50 miles away from his or her former residence could claim a deduction for such expenses or be reimbursed for such expenses by his or her employer on a tax-free basis. Under the Act, neither a deduction nor reimbursement on a tax-free basis is available for moving expenses incurred after December 31, 2017 and before January 1, 2026. However, a deduction is still available for active duty military members whose moves are a result of military orders.
Under previous tax law, employers were permitted to deduct 50 percent of certain entertainment, amusement and recreation expenses, provided that they were directly related to the employer’s trade or business activity. Under the Act, no deduction is permitted for entertainment-related expenses regardless of any nexus with the employer’s trade or business. This exclusion extends to amounts paid for membership or dues for clubs organized for business, pleasure, recreation or other social purpose.
Employer Credit for Paid Family and Medical Leave
While many of the Act’s fringe benefit changes are revenueraising measures, the Employer Credit for Paid Family and Medical Leave provides a tax credit for certain qualifying employers. In 1993, Congress passed the Family Medical Leave Act which allows eligible employees to take up to 12 weeks of leave during any 12-month period. However, there is no requirement that the employee be paid during the approved absence. The Employer Credit for Paid Family and Medical Leave provides a tax credit to employers in order to incentivize certain paid leave programs.
In order to qualify for the credit, an employer must have a written policy which provides at least two weeks of annual paid family and medical leave to full-time employees. The policy must also include a pro rata amount of paid leave for part-time employees. The amount paid during the leave must be no less than 50 percent of the employee’s compensation. If the policy provides paid leave equal to 50 percent of an employee’s compensation, the employer will receive a 12.5 percent credit. The tax credit amount increases by 0.25 percent for each 1 percent of compensation paid while on family medical leave in excess of 50 percent, with a maximum credit of 25 percent if an employee is paid 100 percent of compensation while on leave. The maximum amount of leave eligible for the credit is 12 weeks per employee per calendar year.
An employee will qualify for paid family leave if he or she has been employed by the employer for at least one year and his or her compensation in the prior year did not exceed 60 percent of the compensation threshold for highly compensated employees. For the 2018 tax year, employees who have been employed for at least one year and who had total compensation of $72,000 or less in 2017 would be eligible employees.
However, there are further limitations to the credit. If an employee is required to be paid for his or her leave due to state or local laws, the credit is not available. Additionally, leave which is paid due to vacation, personal leave or sick leave is not eligible for the credit. Finally, the cr
Plan administrators should work with counsel to evaluate employer fringe benefit and paid family leave programs to ensure they are structured to comply with the Act and align with the employer’s talent attraction and retention goals.