The 2017 Tax Act (P.L. 115-97, December 22, 2017) (the “Act”) enacts sweeping changes to the Internal Revenue Code, many of which take effect in just a few days on January 1, 2018. We have highlighted generally below certain of the employee benefits provisions that private¹ employers will want to address as soon as possible in 2018.
Executive/Equity Based Compensation
Excise tax on certain “excess compensation paid by tax exempt organizations." A new 21% excise tax applies to certain compensation paid by tax exempt and governmental organizations in two situations: (1) compensation in excess of $1,000,000 (to the top five highest paid employees) and (2) severance pay to a highly compensated employee that exceeds three times such employee’s base compensation (as defined in Code Section 280G).
Action Item – promptly review compensation arrangements with highly compensated employees (and especially the top 5 highest paid employees) of the organization to determine if the new excise tax applies and if so, the impact it may have on the finances of the organization. These arrangements may be found in individual employment agreements as well as deferred compensation plans and severance arrangements.
2. Deferral of tax on certain broadly-based grants of equity by private companies. Employees of private companies that grant stock options or restricted stock units to at least 80% of employees each year may defer tax for up to 5 years after vesting.
Action Item – employers that offer broad based equity awards should watch for guidance and review the new rules.
Qualified Retirement Plans
Extension of 60-day deadline to rollover loans from a qualified retirement plan. Plan participants who receive distributions of the outstanding balance of a participant loan from a qualified retirement plan will have extra time to “rollover” the loan to an IRA or other qualified plan – instead of the normal 60 day rollover period, employees will now have until the tax filing deadline for their tax return for the year in which they either terminated employment or the plan terminated to pay off the loan.
Action Item – promptly review plan documents, summary plan descriptions, employee notices, distribution forms and other related items such as websites and communications to participants, as well as internal controls affecting plan administration of rollovers of loans from qualified plans to determine if changes are needed.
Health and Welfare Plans
Repeal of Affordable Care Act individual mandate – the Act repeals the individual mandate but not the employer mandate beginning after December 31, 2018.
Action item – review employee communications on this topic to be sure they are still accurate. Applicable Large Employers should be on the watch for IRS notices of proposed penalties. See: IRS-Letter-226J-Special-Alert
Transportation Benefits – the Act eliminates an employer’s deduction for qualified transportation benefits, effective after December 31, 2017. Employees may still receive this type of benefit tax free – the deduction limit is on the employer. For tax exempt employers, these benefits (as well as on premises gyms and other athletic facilities) will be taxable to the employer as unrelated business income.
Action Item - employers that offer free parking, or who pay for mass transit or similar transportation benefits may want to act promptly to establish an employee salary reduction plan to allow employees to choose to pay for these benefits themselves on a pre-tax basis. Another possible approach for parking benefits is to renegotiate leases to obtain free parking from a landlord. Tax exempt employers should review in kind gym and athletic benefits as well.
Tax Credit for FMLA Benefits – in 2018 and 2019 certain employers will be able to claim a tax credit for amounts paid to certain lower paid employees (less than 60% of the highly compensated employee limit) for family and medical leave benefits.
Moving Expenses – except for certain military personnel, moving expenses are no longer excludable from income (effective from 2018 – 2025).
Employee Awards – cash (and cash equivalents such as gift cards, PTP, events) are not excludable from employees’ income as length of service or safety awards, effective after December 31, 2017.
Meals and Entertainment – employers are no longer allowed to deduct costs for “entertainment” The 50% limit that generally applies to meals out will also apply to “on premises meals.” These changes are effective after December 31, 2017.
Because the changes to the tax law, including individual rates and exemptions, as well as taxation of corporations and pass-through entities is dramatically changing in 2018, the impacts are not yet understood. In addition, the new Act will be the subject of both soft guidance and new regulations as we move forward.
Action Item - employers will want to stay informed as additional analysis and additional guidance is issued and interpreted.
¹ The Act imposes new rules and new limits on deductions for performance based compensation and related changes on public companies. A discussion of those changes is beyond the scope of this article.
If you would like further information about any of the issues or action items described in this article, please contact Sherrie Boutwell or any of the other attorneys with Boutwell Fay LLP.
© Boutwell Fay LLP 2017, All Rights Reserved. This handout is for information purposes only, and may constitute attorney advertising. It should not be construed as legal advice and does not create an attorney-client relationship. If you have questions or would like our advice with respect to any of this information, please contact us. The information contained in this article is effective as of December 29, 2017.