January 11, 2018
On December 22, 2017, the President signed into law the "Tax Cuts and Jobs Act1," commonly referred to as "Tax Reform." Several provisions of the Tax Reform Act change the current law concerning employee benefit programs. Those provisions are highlighted below.
- Affordable Care Act (“ACA”) Mandate. The Tax Reform Act reduces the ACA individual mandate penalty to $0, beginning in 2019. This penalty applied to individuals who did not obtain minimum essential health coverage. (The Tax Reform Act does not make any changes to the ACA’s employer mandate or its related penalties.)
- Retirement Plan Loan Offset. The Tax Reform Act extends the period of time during which a retirement plan participant may roll over a loan “offset” that occurs after plan termination or the participant’s severance of employment. The deadline for the rollover will be the due date for filing the participant’s tax return. This provision will become applicable in 2018.
- Distributions taken by Participants in Disaster Areas. The Tax Reform Act provides tax relief to qualified plan and IRA plan participants who (a) lived in a declared disaster area, and (b) took a distribution from their plan between January 1, 2016 and December 31, 2017. Such tax relief includes an exception to early distribution penalties, exemption from mandatory withholding, the relaxation of income inclusion rules and extension of time for making repayments or rollovers.
- Compensation Deduction for Publicly Traded Companies. The Tax Reform Act provides that the $1 million annual limit related to the compensation deduction for publicly traded companies would apply to the company’s CEO, CFO and three most highly compensated officers for the tax year. It also removes exceptions for commissions and performance-based compensation, and provides a grandfather rule for contracts in existence as of November 2, 2017.
- Excise Tax related to Highly Compensated Employees of Tax Exempt Organizations.The Tax Reform Act imposes an excise tax of 21% on compensation in excess of $1 million that is paid by an exempt organization to its five most highly compensated employees beginning in 2018. An exception is provided for compensation paid to certain medical professionals.
- Deductions for Entertainment, Amusement or Recreation. The Tax Reform Act disallows deductions for entertainment, amusement, or recreation activities despite the fact that such expenses may be directly related to or associated with the taxpayer’s trade or business. This provision applies to all amounts paid or incurred on or after January 1, 2018.
- Deductions for Meals, Food or Beverages. The Tax Reform Act disallows deductions for meals, food and beverages if the expenses constitute entertainment, amusement, or recreation. It also limits the deduction for de minimis food and beverage expenses to 50%. The provision applies to all amounts paid or incurred on or after January 1, 2018.
- Deductions for Qualified Transportation Fringe Benefits. The Tax Reform Act disallows a deduction for qualified transportation fringe benefits. Additionally, it eliminates the deduction for employer-provided transportation or payment for commuting to work unless it was necessary for ensuring an employee’s safety. Finally, this provision imposes a tax on the value of qualified transportation fringe benefits provided by a tax-exempt entity (by treating such amounts as unrelated business tax income). This provision applies to all amounts paid or incurred on or after January 1, 2018.
- Exclusion for Qualified Bicycle Commuting Reimbursement. The Tax Reform Act repeals the income exclusion rule for qualified bicycle commuting reimbursements, beginning on or after January 1, 2018.
- Employee Achievement Awards. The Tax Reform Act limits the employee exclusion and employer deduction for employee achievement awards. It provides that such exclusion and deduction would not apply to cash, gift certificates, vacations, event tickets and other similar items. This provision becomes effective for tax years beginning on or after January 1, 2018.
- Employer Credit for Paid Family and Medical Leave Act (“FMLA”) Leave. The Tax Reform Act creates a tax credit for employers that provide paid FMLA leave in 2018 and 2019.
- Qualified Moving Expenses. The Tax Reform Act repeals the employee income exclusion and deduction rules related to qualified moving expense reimbursements and payments, except for members of the Armed Forces on military duty moving pursuant to a military order. This provision is effective beginning on January 1, 2018 and extends through December 31, 2025.
If you would like more information regarding how the Tax Reform Act will impact your employee benefits program, or if you would like to discuss benefit planning options in light of the Tax Reform requirements, please contact one of the employee benefit specialists at Foster Swift.
1. The name of the Act was changed by the Senate during final reconciliation.
This piece is updated from an original article that was published on December 20, 2017.