Tax reform – Healthcare and employee benefit related changes

On Dec. 22, 2017, President Trump signed into law Congress’s tax reform legislation. The summary below addresses some of the changes that relate to compensation and employee benefits.

Individual shared responsibility – With respect to health care and employee benefits, the most important feature of the tax act is the elimination of the penalty on individual taxpayers who do not maintain minimum essential coverage. However, please note that this elimination of the penalty is prospective and only applies for months beginning after Dec. 31, 2018. Thus, the penalty remains fully in effect for 2018.

With the reduction in the penalty, some employers may see fewer employees enroll in health care coverage during their 2019 healthcare benefit open enrollment period. However, most employees will continue to view employers that offer health insurance coverage more favorably than those who do not. Therefore, offering health insurance will remain a valuable and tax-efficient recruiting and retention tool.

This may also reduce the number of individuals who enroll in healthcare through either the federal or various state specific healthcare marketplaces. However, premium tax credits will still be available for those individuals that purchase health insurance through these marketplaces. If enough healthy individuals drop their coverage, both the individual and employer group health market will likely see some cost increases to pay for the adverse selection impact of this change.

It is also important to remember that this change applies to the individual penalties only. The potential employer penalties for failing to offer coverage or offering inadequate coverage will remain, as well as the current law’s information reporting requirement.

Employee fringe benefits – From an employee perspective, there are several changes to existing fringe benefit rules:

1. Reimbursing bicycle commuting expenses– Employers can no longer exclude as a nontaxable fringe benefit reimbursements to employees for qualified bicycle commuting expenses. This change is actually a suspension of the rule permitting the exclusion of up to $20 per month per employee. The rule reactivates on Jan. 1, 2026.
2. Employee achievement awards– Under current law, certain employee achievement awards of tangible personal property are not, within limits, income to the employee. The act clarifies that items like cash, gift cards, other cash equivalents, theater or sporting tickets, vacation vouchers, etc. do not qualify as tangible personal property.
3. Moving expense reimbursements– Current law excludes from an employee’s gross income any reimbursements received from an employer for moving expenses. The tax act suspends this exclusion tax years beginning after Dec. 31, 2017, and before Jan. 1, 2026.
4. Entertainment type expenses– The new tax law repeals the present-law exception to the deduction disallowance for entertainment, amusement, or recreation that is directly related to (or, in certain cases, associated with) the active conduct of the taxpayer’s trade or business (and the related rule applying a 50 percent limit to such deductions).
5. Employee travel expenses– Taxpayers will generally be able to continue to deduct 50 percent of the food and beverage expenses associated with operating their trade or business (e.g., meals consumed by employees on work travel). In addition, for amounts incurred and paid after Dec. 31, 2017 and until Dec. 31, 2025, the provision expands this 50 percent limitation to expenses of the employer associated with providing food and beverages to employees through an eating facility that meets requirements for de minimis fringes and for the convenience of the employer. Such amounts incurred and paid after Dec. 31, 2025 will not be deductible.

Family and medical leave credit – For 2018 and 2019, employers will be able to claim a general business credit for wages paid to qualifying employees during any period in which such employees are on family and medical leave. The amount of credit is 12.5 percent of the amount of wages paid to qualifying employees during any period in which such employees are on family and medical leave if the rate of payment under the program is 50 percent of the wages normally paid to an employee. The credit increases by 0.25 percentage points (but not above 25 percent) for each percentage point by which the rate of payment exceeds 50 percent. The maximum amount of family and medical leave that an employer may take into account with respect to any employee for any taxable year is 12 weeks.

Other benefit-related provisions that are NOT in the final act

Earlier legislative drafts by the House and Senate included proposals that would have affected other areas of employee compensation and benefits. These provisions were not included in the final Act so they remain the same as under current law:

• Employer-provided child care credit
• Work opportunity tax credit
• Medical savings accounts
• Dependent care assistance
• Hardship distributions from qualified plans
• Uniform in-service distribution rules for pension and employee savings plans
• Nondiscrimination rules for frozen defined benefit plans
• Employer social security taxes on employee tips
• Nonqualified deferred compensation taxed on vesting
• Employer-provided housing exclusion
• Employer-provided adoption credit
• Employer-provided education assistance

Income tax withholding

The act eliminated personal exemptions and increased the standard deductions for taxpayers to the following:

• $24,000 for married taxpayers filing jointly
• $18,000 for heads of households
• $12,000 for all other individuals

These changes mean that current IRS withholding tables (which use a person’s exemption and filing status as the basis for required income tax withholding) are completely out of date. Employers and payroll providers will be anxious for the IRS to issue revised guidelines.

Conclusion

As with all other areas, these compensation and benefit related changes require employers to reevaluate some policies. The good news is that the changes are not as monumental as the changes in many other areas. The bad news is that could lull employers into overlooking them. As always, tread lightly and consult your tax advisors as necessary.