Tax Reform Takes a Cut at Welfare and Fringe Benefits
November 10, 2017
In the past couple of days, we have looked at H.R. 1 – Tax Cuts and Jobs Act (the “Bill”) and its impact on (1) executive compensation and nonqualified deferred compensation plans (see Proposed Tax Bill Radically Alters Nonqualified Deferred Compensation and Executive Compensation) and (2) tax-qualified plans (see Qualified Retirement Plans are Winners under the Tax Cuts and Jobs Act). Today we will look at the impact of the Bill on welfare and fringe benefits. As you will see below, the Bill proposes to cut a number of tax-favored benefits—something both employers and employees must know and understand.
• Repeal of employer-provided education assistance plans. Under Internal Revenue Code (“Code”) Section 127, employers may provide up to $5,250 of qualified educational assistance on an annual basis on a tax-favored basis. The Bill would repeal this provision of the Code making such assistance taxable compensation.
• Repeal of employer qualified moving expense reimbursements. Code Section 132(g) generally provides that employers may reimburse employees for certain moving expenses on a tax-free basis. The Bill would repeal this provision making such reimbursement taxable.
• Repeal of employer-provided qualified adoption programs. Code Section 137 states that amounts paid by an employer for qualified adoption expenses are excludable from an employee’s compensation if certain requirements under the Code and guidance thereunder are satisfied. The Bill would repeal Code Section 137.
• Repeal of dependent care assistance programs. Many employers provide dependent care assistance programs under their cafeteria plans. Under Code Section 129, employees may contribute compensation on a tax-favored basis via an employer cafeteria plan and be reimbursed for dependent care assistance expenses. The Bill would eliminate Code Section 129. NOTE, however, that an amendment to the Bill issued shortly after its approval by the House delays this repeal until 2023 (an example of just how fluid tax reform is and why employers need to be patient as tax reform unfolds).
• Archer MSAs. Although these accounts are less common these days, the House decided to finally take action and suspend all tax-favored benefits associated with these accounts. Deductible or excludable contributions would be eliminated under the Bill. Individuals would continue to be able to roll over Archer MSA balances to an HSA on a tax-free basis.
• Employee achievement awards. Awards that meet certain requirements that are provided by employers to employees for hitting length of service or safety milestones are both (1) excludable from the employees income and (2) deductible by the employer. The Bill would eliminate this income exclusion for employees and place restrictions on an employer’s ability to deduct the cost of such awards.
• Restrictions on employer-provided lodging. Code Section 119 provides that an employee may exclude meals and lodging provided by the employer from income if the meals/lodging were provided for the convenience of the employer (and certain other requirements are met). The Bill would place limits on lodging. First, the lodging exclusion under the Bill would be capped at $50,000 per year ($25,000 if a married individual filing separately). In addition, the cap would be phased out for highly compensated employees. Finally, the exclusion is subject to a limitation of one home.
• Repeal of certain tax-favored fringe benefits. The Bill takes aim at a number of fringe benefit deductions. First, qualified transportation and parking benefits under Code Section 132 are benefits that may be excluded from employees’ income (assuming the requirements of Code Section 132 are satisfied) and deducted by employers. The Bill would repeal the deduction for these benefits. In addition, deductions for entertainment, amusement or recreation activities, facilities, or memberships would be disallowed under the Bill. Another change is that on-site gyms and various other amenities that are primarily personal in nature would lose their deductibility unless treated as compensation to employees. Finally, the current 50% limit on meals and entertainment would apply only to meals under the Bill—the deduction would no longer be applicable to entertainment.
• Repeal of child care credit. Code Sections 38 and 45F provide for the employer-provided child care credit, which allows a credit of up to $150,000. The Bill would eliminate this credit.
One important Bill provision to note on the individual taxpayer side of things is that the Bill also would repeal the medical expense deduction under Code Section 213. Another area of concern is Bill language impacting the methods and ability for an employee to deduct and/or be reimbursed for business expenses.
Also of note are the previously discussed possible tax law changes affecting employee benefits that were not proposed. One big item is the Affordable Care Act’s Cadillac Tax. For years there has been discussion on an additional extension or elimination of this tax. For now, the Cadillac Tax lives. In addition, there has been discussion of adding limitations on the tax-favored status of health plan coverage for employees. The Bill does not contain any provisions in this area.
As with any proposed legislation, the provisions are subject to change as the legislation goes through the political process. The Senate version of tax reform may look very similar or radically different than the House Bill. However, because of the potential changes to the world of employee benefits, employers must know and understand the potential changes as they consider their total rewards design in the future.
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