In addition to the well-publicized tax cuts for individuals and corporations contained in the federal tax legislation enacted on December 22, 2017, informally known Tax Cuts and Jobs Act of 2017 (the Act), there are significant tax changes to benefit and compensation programs. This article highlights some of the important changes impacting employee benefits that became effective January 1, 2018.
Health and Retirement Plans
The Act did not alter the requirement for large employers (50 or more full-time employees) to offer affordable coverage of minimum value to ninety-five percent of full-time employees and their dependents. However, the Act eliminates the individual mandate requiring all Americans to purchase health coverage beginning in 2019. As a result, employers may see more employees declining coverage either for themselves or for members of their family. Although there were sweeping proposed changes to retirement and deferred compensation plans in early drafts of the Act including significantly limiting the deferral of taxation for deferred compensation plans by the repeal of Tax Code Section 409A, the Act only made minor changes to retirement and deferred compensation plans. Under prior law, employees who left employment with an unpaid outstanding 401(k) plan loan had 60 days to contribute to an IRA or to another qualified employer plan an amount equal to the loan to avoid having their loan become a taxable withdrawal. The Act extended this period to the due date of the employee’s tax return The Act also provides favorable tax treatment for early distributions from retirement plans made during 2016 and 2017 as a result of losses suffered by employees directly impacted by major disasters. To permit employees to take advantage of the favorable distribution taxation, the Act requires an employer to adopt a plan amendment incorporating the change. The Act imposes new excise taxes on tax exempt organizations that pay excess compensation, even if the amount paid is determined to be reasonable under other Tax Code rules. New Code Section 4960 adds a 21 percent excise tax on compensation in excess of $1 million paid to the five highest paid current and former employees (covered employees). The 21 percent excise tax is also payable if severance payments to covered employees exceed three times the employee’s average compensation. Licensed medical professionals (including a doctor, nurse or veterinarian) receiving compensation for
performing services in their professional capacity will not trigger the excise tax.
New Qualified Equity Grants
The Act added Code Section 83(i) that allows for additional tax deferral on stock received by employees from stock options and restricted stock units (RSUs) granted under a conforming Section 83(i) plan. An employer must grant either options or RSUs with the same rights and privileges to 80% of “non-excluded” employees each year in order for the plan to comply with 83(i). However, the Act provides (but does not define the parameters) that a private employer may grant de minimis amounts to some employees. An election to defer income inclusion must be made no later than 30 days after the first time the employee’s right to the stock is substantially vested or is transferable, whichever occurs earlier. If an employee makes a Section 83(i) election, unlike the taxation of non-83(i) non-qualified options and RSUs which requires taxation on option exercise or RSU vesting, the employee is eligible for deferral of taxation for up to 5 years. Although the 83(i) plan provides tax benefits to employees, the 80 percent requirement and a limitation on employee put or employer repurchase rights at stock issuance is likely to make 83(i) plans unattractive for many business owners who normally prefer to limit stock ownership to a limited group of key employees.
Tax Credits for Paid Leave
The Act establishes a new tax credit for the 2018 and 2019 tax years that is available to employers that establish a written qualifying paid leave program. Employers must offer all full-time employees who have worked for the employer at least a year two or more weeks of annual family and medical leave, paid at a rate of at least 50 percent of normal wages. The tax credit starts at 12.5 percent of wages for leave pay at 50 percent of wages and is increased by 0.25 percentage point, to as much as 25 percent, for each percentage point that wages paid exceed 50 percent of regular earnings. The credit is available for as many as 12 weeks of leave. Leave paid or required by a state or local government is not taken into account in determining the amount of paid leave provided nor is sick leave, vacation and personal days.
Reductions in Business Deductions The Act reduces or eliminates the deductibility of numerous business expenses some of which directly benefit employees such as transportation benefits, including employee parking, employee meals and entertainment expenses. Although most employers will not seek to pass along the cost of these expenses to employees or impute income so as to preserve deductibility, some may do so. The Act also clarifies the ability of employers to award deductible, non-taxable employee achievement awards An employer may not deduct any achievement award that is not tangible personal property. Specifically excluded is cash, cash equivalents, gift cards, gift coupons or gift certificates (other than arrangements conferring only the right to select and receive tangible personal property from a limited array of such items preselected or pre-approved by the employer), or vacations, meals, lodging, tickets to theater or sporting events, stocks, bonds, other securities, and other similar items. As with all tax legislation, how the changes made by the Act apply to different fact patterns will evolve as the Internal Revenue Service issues formal and informal guidance. Until guidance is issued, employers are encouraged to contact their tax advisors for advice on the complexities of the Act.