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Tax Bill Will Impact Employee Benefits
On Friday, December 15, Congress unveiled the final Tax Cuts and Jobs Act (the “Tax Bill”). The bill, crafted by Republican members of the congressional tax committees, features a few changes from the House and Senate versions. The House passed the Tax Bill on Tuesday, December 19, but due to a procedural issue the Tax Bill will be voted upon again today, December 20. The Tax Bill was approved by the Senate early this morning, with President Trump expected to sign it into law before the end of the year.
The table below summarizes some of the primary changes to executive compensation, health and welfare benefits, and retirement plan benefits. As noted below, pursuant to the Tax Bill, many of these changes are effective beginning with the 2018 tax year and are set to expire beginning with the 2026 tax year. Notably, beginning in 2019, the Tax Bill repeals the individual mandate penalty, a key provision in the Patient Protection and Affordable Care Act of 2010 (the “ACA”).
Overview of Changes to Benefits Under the New Tax Bill
Tax Bill Changes to Existing Law
|Code Section 162(m) Deduction Modification||Publicly traded companies are allowed a $1 million deduction for commissions and performance-based compensation for covered employees||Eliminates the exception for commissions and performance-based compensation from the $1 million deduction so these amounts exceeding $1 million are not deductable
Expands definition of “covered employee” to include the chief financial officer (in addition to the chief executive officer)
Expands the definition of employer to include any employer required to file reports under Section 15(d) of the Securities Exchange Act of 1934
Adds a provision that payment will not fail to be applicable remuneration merely because it is includible in income of a person other than a covered employee (i.e., a beneficiary)
|Tax on “Excessive” Executive Compensation in Tax-Exempt Organizations, Political Organizations, and Government Entities||There is no excise tax on executive compensation in excess of $1 million as long as the compensation was reasonable||Tax-exempt organizations, political organizations, and government entities will be subject to a 21 percent excise tax on compensation in excess of $1 million paid to any of its five highest paid employees (such individual must also fit within the definition of a highly compensated employee as defined in Code Section 414(q)) for the tax year. The excise tax would apply to all compensation except for amounts designated as Roth contributions, payments to a tax-qualified retirement plan and amounts that are excludable from the executive’s gross income
The excess payments would also apply to excess parachute payments paid to covered persons.
|Addition of Qualified Equity Grants||Allows private companies to offer qualified employees the opportunity to defer income tax inclusion on stock options and restricted stock units for up to five years if certain requirements in new Code Section 83(i) are satisfied
The employer must have a written plan in which at least 80% of all U.S. employees are granted qualified stock options or restricted stock units
The Code Section 83(i) deferral rule is not extended to 1% owners, current or former CEOs and CFOs (including their family members) or any individual who was one of the four highest paid during the tax year
Health and Welfare Benefits
|ACA Individual Mandate Penalty Repeal||The monthly penalty for 2017 is the greater of 1/12 of: (i) 2.5 percent of taxpayer’s household income, or (ii) $695||Repeals individual mandate penalty, effective in 2019|
|Qualified Bicycle Commuting Reimbursement Exclusion Suspension||An employer may choose to reimburse an employee up to $20 per month for reasonable expenses incurred by the employee in conjunction with their commute to work by bike||Suspends the exclusion for tax years beginning in 2018 through 2025|
|Qualified Moving Expense Reimbursement Suspension||Generally, employees allowed to deduct any amount received (directly or indirectly) by an individual from an employer as a payment for (or reimbursement of) expenses which would be deductible as moving expenses under Code Section 217 if directly paid or incurred by the individual||Suspends the exclusion for tax years beginning in 2018 through 2025 except for members of the U.S. Armed Forces on active duty who move pursuant to a military order|
|Loan Rollover Time Period Extension||Generally, if an outstanding loan has not been fully repaid when the participant terminates employment, or whose plan terminates, the outstanding balance is offset against the participant’s account balance and becomes taxable if not repaid or rolled over within 60 days||Extends rollover period for employees who separate from employment or whose plan terminates with outstanding plan loans to the due date for filing their tax return (including extensions)
Employees are permitted to contribute the loan balance to an IRA to avoid the loan being taxed as a distribution
|Roth IRA Contribution Re-Characterization||An employee may transfer a contribution from a traditional IRA to a Roth IRA (and vice versa) if he or she does so by October 15 of the year following the conversion||Repeals the ability of an individual to re-characterize a contribution to traditional IRA as a contribution to a Roth IRA, but re-characterization cannot be used to unwind a Roth IRA contribution.|
The Tax Bill also limits or eliminates a variety of fringe benefit deductions including qualified transportation fringe benefits and meals provided at the convenience of the employer. Hall Benefits Law recommends that plan sponsors consult with ERISA counsel regarding the changes to benefits legal compliance issues under the Tax Bill and its impact on businesses. We will host a free webinar on January 23rd, the focus of which will be the Tax Bill.
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