Tax Reform: Impact on Benefits (article)
The Tax Cuts and Jobs Act (Public Law 115-97), enacted on December 22, 2017, makes broad sweeping changes to the existing tax code in many ways. While the bulk of the law addresses a variety of topics relating to changes to individual and corporate tax matters, there are some provisions impacting employee benefits.
Benefit-related Changes Impacting Individuals
- Repeal of Individual Shared Responsibility Penalty. As background, beginning in 2014, all individuals residing in the United States are required to maintain a minimum level of health coverage, or be subject to a tax penalty. This tax penalty is repealed, effective for tax years beginning January 1, 2019.
- The medical deduction threshold is reduced from 10% to 7.5% for the 2017 and 2018 tax year.
- Beginning in 2018, up to $10,000 in tax-free distributions from a qualified tuition program, known as a 529 Plan, can be used to pay tuition, fees, academic tutoring, special needs services, books, supplies, and other equipment expenses in connection with enrollment or attendance at elementary or secondary public, private, or religious school.
Benefit-related Changes Impacting Businesses
Employer Credit for Paid Family and Medical Leave
Under the tax law, employers subject to the Family and Medical Leave Act (FMLA) are entitled to claim a general business tax credit based on wages paid to qualifying employees during any period in which such employees are taking FMLA leave.
Employers eligible for credit. An employer entitled to the credit is one who has a written FMLA policy in place that allows all qualifying full-time employees a minimum of two weeks of annual paid FMLA leave, and which policy also permits non-full time qualifying employees a comparable amount of leave on a pro rata basis. For purposes of this requirement, leave paid by a state or local government is not taken into account. Paid leave such as vacation leave, personal leave, or other medical or sick leave provided by the employer is not to be considered leave for which the credit would be available.
For purposes of the credit, a qualifying employee is one who has been employed by the employer for at least one year, and whose compensation for the preceding year does not exceed 60% of the compensation threshold for highly compensated employees (less than $72,000).
Amount of credit. For leave payments of 50% of normal wage payments, the credit amount is 12.5% of wages paid on leave. If the leave payment is more than 50% of normal wages, then the credit is raised by 0.25% for each one percent by which the rate is more than 50% of normal wages. Thus, if the leave payment rate is 100% of the normal rate, i.e., is equal to the normal rate, then the credit is raised to 25% of the on-leave payment rate. The maximum leave allowed for any employee for any tax year is 12 weeks.
Effective date. The FMLA tax credit is only available for a two-year period beginning January 1, 2018 and ends December 31, 2019. It is anticipated that the IRS will issue guidance and clarifications relating to claiming the credit.
Fringe Benefit Changes
- Beginning January 1, 2018, the qualified bicycle commuter benefit is suspended until 2026. Under prior law, if an employer sponsors a qualified bicycle fringe benefit plan, a participating employee who uses a bicycle for traveling between his/her home and place of employment was entitled to receive a reimbursement of up to $20 per month ($240 annually) for qualified bicycle expenses.
- Under a qualified transportation program (IRC Section 132(f)), certain expenses such as parking, mass transit fares, and van pooling are deductible by the employer and are excludable from the employee’s income. Beginning January 1, 2018, the qualified transportation deduction is no longer available to employers; however, the tax credit available to employees is retained. The tax law did not make changes to salary reduction qualified transportation programs – these types of programs remain permissible, allowing employees to make pre-tax contributions toward the benefit. Important to note that affected employers in jurisdictions that mandate qualified transportation benefits, such as in the District of Columbia, New York City, and San Francisco Bay Area, by way of example, must review these tax changes prior to modifying their transportation benefit programs.
Pension and Retirement-related Changes
- Elimination of rule allowing re-characterization of IRA contributions. Under current law, individuals are permitted to re-characterize a contribution to his/her traditional or Roth IRA to another type of IRA by making a trustee-to-trustee transfer prior to the due date of the individual’s tax return. This rule is repealed effective for tax years beginning January 1, 2018.
- Extended rollover period for rollover of plan loan offset amounts. Currently, if an individual ceases making payments toward a loan from a qualified retirement plan, such as a 401(k) plan, prior to repaying the loan, the balance of the loan is generally treated as a distribution and subject to the 10% early distribution tax penalty unless the unpaid loan balance or offset is rolled over into an eligible retirement plan within 60 days. The tax reform law extends the deadline of the plan loan offset from 60 days to the due date, including extensions, of the participant’s tax return for the year the distribution occurs.
- Relief from the early withdrawal tax for qualified disaster distributions. Generally, early distributions from a qualified retirement plan, including a tax-sheltered annuity plan or IRA, is subject to a 10% early withdrawal penalty. This penalty is waived for distributions made between January 1, 2016 and December 31, 2017 for Presidentially-declared disasters occurring in 2016. The amount can either be includible as income ratably over 3 years, or can be contributed back to the plan over three years. The qualified plan can be amended to provide for this, as long as the amendment is adopted by the last day of the end of plan year that begins in 2018.
Change in Computation of Cost of Living Adjustments
Currently, cost of living adjustments applicable to income, as well as certain benefit-related tax code provisions, such as health flexible spending account salary reduction contributions, wage limits applicable to the small business tax credit, dollar limits under a qualified transportation program, and the like, are based on the Consumer Price Index for all Urban Consumers (“CPI-U”) computation formula. The tax reform law requires such computation indexing based on a chained CPI-U (“C-CPI-U”) index. This will likely result in a slower increase in the cost of living adjustments in the future.
Additional Information. More highlights of this law are included in our December, 2017 edition of At Issue. The Accounting and Tax Division of CBIZ also have several articles and analysis of this tax reform law available on the CBIZ.com website. In addition, as part of our 2018 CBIZ B&I webinar series, we will be hosting a webinar on February 27th to discuss the changes made by the Tax Cuts and Jobs Act. To sign up for this webinar, please visit our webinar webpage on CBIZ.com.
The information contained in this article is provided as general guidance and may be affected by changes in law or regulation. This article is not intended to replace or substitute for accounting or other professional advice. Please consult a CBIZ professional. This information is provided as-is with no warranties of any kind. CBIZ shall not be liable for any damages whatsoever in connection with its use and assumes no obligation to inform the reader of any changes in laws or other factors that could affect the information contained herein.