How Tax Reform Could Impact Employee Benefits

The U.S. Senate and House have passed the Tax Cuts and Jobs Act. President Trump is expected to sign the tax reform bill into law soon. How would employee benefits be affected under the law?

How Tax Reform Could Impact Employee Benefits

Not changing

Let’s start with what would not be affected. A number of ideas were floated in earlier versions of the tax reform bill that were not included in the final version. The tax treatment of the following employee benefits remains unchanged:

  • Tuition assistance
  • Adoption assistance
  • Dependent care assistance, including dependent care FSAs
  • 401(k) hardship distributions
  • Nondiscrimination rules for defined benefit pension plans
  • Age at which employees can begin receiving defined benefit pension while still working
  • Employer reporting and coverage responsibilities under the Affordable Care Act

What’s changing?

  • Employers will not be able to take tax deductions on expenses used for:
    • Employee meals
    • Achievement awards that are considered “tangible personal property”
    • Mass transit and parking benefits
    • Bicycle commuting reimbursements
  • Paid family and medical leave credit: Effective in 2018 and 2019, employers can obtain a tax credit of up to 25% of wages paid to employees while on FMLA leave (subject to certain requirements and limitations).
  • Defined contribution plan loans: After separating from employment, employees will have a longer time period to repay outstanding loans before the outstanding balance is considered taxable income.
  • Health care: The individual mandate penalty will change to $0 on January 1, 2019, effectively eliminating the penalty for 2019. This does not directly affect employers.

Things that change for employers, but not for employees

Although employers will now be taxed on funds used for employee meals, on-site gyms, mass transit and parking benefits, employees will still be able to exclude the value of these benefits from their income.

What else?

Some executive compensation tax rules are changing. In addition, a number of business tax changes will indirectly affect employee benefits.

For more detailed information in the future on how the new tax law will affect various employee benefits, look here on Word on Benefits and on our tax reform tracker. Many details will need to be spelled out in government agency guidance. Unseen practical effects and unintended consequences will undoubtedly arise. The law will be amended many times in the coming years, so stay tuned.

Lois Gleason, CEBS
Lois Gleason, CEBS
Senior Information/Research Specialist at the International Foundation

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