On Dec. 22, 2017, Pres. Trump signed H.R. 1, the Tax Cuts and Jobs Act, creating Public Law No. 115-97. The Tax Cuts and Jobs Act (2017 Tax Reform Law) made significant changes to the IRC, with its primary impact on corporate and individual tax rates and other non-benefits areas. This article is meant to summarize the changes that impact employers with respect to employee benefit offerings.
ACA Individual Mandate Penalty Repealed
First, beginning in 2019, the 2017 Tax Reform Law repeals the tax penalty under the ACA’s individual mandate — the requirement for all U.S. citizens to purchase health insurance or pay a tax penalty. While the exact impact of the mandate’s repeal is unknown, many people forecast this will lead to an increase in health insurance premiums (particularly in the individual market) and in the number of uninsured, which could further destabilize the health insurance marketplace. Others believe the current instability of the marketplace is evidence that the individual mandate hasn’t supported competition and growth, and therefore the repeal of it will have minimal impact. Regardless, with the penalty for failure to carry health insurance gone, employers may see a decline in their group health plan participation rates for employees that choose to forego coverage altogether.
Note that the 2017 Tax Reform Law doesn’t impact the ACA’s employer mandate. That means employers must still identify and offer affordable health insurance coverage to all full-time employees and their dependents. Similarly, the employer reporting obligations under IRC Sections 6055 and 6056 remain in place, meaning employers still must complete and file appropriate forms (Forms 1094/95-B or 1094/95-C) with the IRS each year and distribute a copy of Form 1095-C (or a substitute statement) to employees.
Changes to Commuter Benefits
Beginning in 2018, the 2017 Tax Reform Law repeals the employer business deduction for qualified mass transit and parking benefits (with an exception for certain situations involving the safety of the employee). Specifically, employers may no longer deduct the cost of providing qualified transit passes, parking expenses, commuter highway and bicycle commuter reimbursement costs. The 2017 Tax Reform Law also repeals the exclusion for gross income and wages for qualified bicycle commuting costs and reimbursements (beginning in 2018 and running through the end of 2025). This means employees must recognize as income any employer payment or reimbursement for bicycle commuter costs.
Because IRC Section 132 was not changed, though, employees may still exclude from gross income the value of commuter benefits purchased with pretax salary reduction contributions (through a Section 125 plan). Thus, employees may continue to make pretax contributions for parking and transportation costs, but not for bicycling costs.
Employers that previously subsidized mass transit and parking might consider switching to exclusive employee pretax contribution designs. Importantly, employers in cities that require employers to maintain employee pretax contributions (such as Washington D.C., New York and San Francisco) should review local ordinances before coming to any conclusions on their transportation fringe benefit programs.
Employer Tax Credit for Providing Paid Family Leave
Interestingly, the 2017 Tax Reform Law provides for a new tax credit for wages paid by employers in 2018 and 2019 to employees that are on an FMLA-protected leave. While FMLA currently provides job and benefits protection for those out on an FMLA-protected leave, FMLA doesn’t require that the leave be paid. Employers that provide ”qualifying employees” at least two weeks of annual paid family and medical leave that provides at least 50 percent wage replacement would be eligible for the tax credit. A “qualifying employee” is one who has been employed for at least one year and who didn’t have compensation (for the preceding year) in excess of 60 percent of the compensation threshold for highly compensated employees (for 2018, 60 percent of $120,000, which would be $72,000).
In addition, the employer must outline their policy in writing. The tax credit itself depends on how much replacement wages the employer provides, but it generally ranges from 12.5 percent (for employers paying up to 50 percent of wages) to 25 percent (for employers paying more than 50 percent of wages) of the cost of each hour of paid leave. Importantly, personal leave (such as PTO or vacation pay) or pay mandated by a state or local government may not be taken into account for purposes of the new tax credit.
We anticipate that the federal government will provide additional guidance on the new tax credit which will hopefully flesh out more of the details. In the meantime, because the new tax credit implicates leave policies (an area outside benefits compliance generally), employers should work with outside counsel or an HR professional in developing their leave policies in a way that allows them to take advantage of the new tax credit.
The 2017 Tax Reform Law will have minimal impact on most retirement plans. But there are some minor changes to consider. First, under prior law, if a qualified retirement plan (including 401(k) plans) account balance is reduced to repay a plan loan, and the amount of that offset is considered an eligible rollover distribution, the offset amount may be rolled over into an eligible retirement plan (so long as the rollover occurs within 60 days). Under the 2017 Tax Reform Law, the 60-day deadline is extended until the due date for the participant’s individual federal income tax return (including extensions) for the year in which the amount is treated as a distribution. Thus, an employee who terminated employment with an outstanding loan could avoid having adverse tax consequences relating to that loan if the employee rolls over the loan amount to an IRA or eligible retirement plan before they file their federal income tax return for that year. This provision applies to employees whose plan terminates or who separate from employment after Dec. 31, 2017.
The new law also allows retirement plans (including 401(k) plans) to help victims of federally declared major disasters occurring in 2016 through a special distribution event (i.e., one that avoids the normal 10 percent early withdrawal penalty for distributions received before age 59 ½). Specifically, the new law provides relief from the early withdrawal penalty for up to $100,000 for qualified 2016 disaster distributions (those taken from a retirement plan between Jan. 1, 2016, and Jan. 1, 2018) to an individual whose principal place of abode at any time during 2016 was located in a 2016 area impacted by a federally declared major disaster (as declared by the President). Qualified disaster distributions are taxed ratable over three years (rather than all in one year) and the distribution amount may be recontributed to an eligible retirement plan within three years. Employers may amend their retirement plans retroactively to take advantage of the new distribution rules.
Employers with questions regarding retirement plan changes should work with their advisor or outside counsel.
Dependent Care and Adoption Assistance Left Untouched
Although prior versions of 2017 Tax Reform Law made changes to the exclusion for dependent care flexible spending arrangements (known as a dependent care FSA or dependent care assistance program, DCAP), that exclusion remains untouched in the law as passed. Similarly, the adoption tax credit and exclusions for educational assistance programs and qualified tuition reductions remain in place.
The 2017 Tax Reform Law generally disallows employer deductions for entertainment, amusement, recreation, meals and other food expenses. There are also changes to the tax treatment of employee achievement awards, on-site athletic facilities and employee moving expenses. Because those tax provisions are generally outside the scope of health and welfare benefits, employers should consult with a tax advisor for questions relating to these changes.
Overall, the 2017 Tax Reform Law doesn’t have a major impact on employee benefit offerings. While the repeal of the ACA’s individual mandate penalty may impact the health insurance market generally, it doesn’t directly affect employers’ requirements to comply with all the other ACA provisions.
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