Employee benefits professionals scoured the House Republicans’ proposed Tax Cuts and Jobs Act with some trepidation after its release on November 2, 2017. While many were relieved to find no changes in this draft to the tax treatment of employer-sponsored health care benefits and 401(k) plan contributions, they found that the favorable tax treatment of other common employee benefits might not remain favorable. On the other hand, certain proposed changes could ease restrictions for retirement plan participants and sponsors.
Most employers will experience some changes. Let’s take a look at the benefits that would be impacted by the proposed tax reform.
The table below lists many of the benefits that could be affected by the Tax Cuts and Jobs Act and the percentage of employers offering these benefits, as reported in the International Foundation 2016 Employee Benefits Survey.
The Tax Cuts and Jobs Act is only a proposed bill—many changes, additions and deletions will likely be made before it would become law. As it currently stands, here are some components of the bill that would affect employee benefits and how:
401(k) hardship withdrawals and plan loans
- In a hardship distribution, employees could withdraw not only their own contributions but also any earnings on those contributions and possibly the employer’s contributions.
- After a hardship distribution, employee contributions and employer matches to the plan could continue uninterrupted and would not be subject to the current six-month waiting period before resuming.
- An employee would not have to take the maximum 401(k) loan available in order to qualify for a hardship distribution.
- Workers leaving employment with outstanding loans would have until their tax return due date to repay or roll over 401(k) plan loans. Currently, if former employees do not repay a loan or roll over the balance to another eligible retirement plan within 60 days of termination of employment, the IRS treats the outstanding loan balance as a taxable distribution.
In-service retirement plan distributions (distributions made while employee is still working)
For defined benefit (DB) plans and some defined contribution (DC) plans, the current minimum age for penalty-free in-service distributions is 62. The proposed bill would allow all DB and DC plans to use 59½ as the minimum age for penalty-free in-service distributions.
Pension nondiscrimination testing
Plan sponsors could receive nondiscrimination testing relief on closed DB plans if they give new employees an increased benefit in a DC plan. Cross-testing between DC and DB plans would be less restrictive.
Dependent care assistance
The proposed bill eliminates the tax exclusion for dependent care assistance programs. However, an amendment proposed November 6 would restore the tax exclusion. Currently, pretax contributions of up to $5,000 are allowed for dependent care expenses such as day-care costs.
Tax exclusions for employer-provided adoption benefits would be eliminated. Currently, up to $13,570 per child can be provided by an employer tax-free to an employee.
Employee education assistance
The proposed bill eliminates the current exemption allowing employers to provide employees up to $5,250 per year tax-free in education assistance for undergraduate, graduate or certificate-level education. As the bill now stands, it would be taxable income to the employee.
[Stay on top of the latest developments in Washington that are impacting employee benefits with the Benefits Transition Tracker]
Employee or dependent tuition assistance
Employees would be taxed on tuition reduction programs for employees, spouses or dependents. Currently, tax exemptions are allowed for qualified tuition reduction programs.
Relocation stipend deduction would be eliminated.
Employee achievement awards
Proposed bill eliminates tax exclusion for employee achievement awards (such as years-of-service awards).
Employer-provided housing and meals
Proposed bill eliminates income tax exclusion for meals provided to employees for the employer’s convenience.
Under the proposed bill, entertainment expenses are no longer deductible (although business meals would remain deductible).
Employers would no longer be allowed to deduct expenses for qualified transportation benefits such as transit and parking.
Note: Tax-exempt employers would be subject to unrelated business income tax on these expenses.
State and local governmental pension plans:
These plans would now be subject to unrelated business income tax.
Executive compensation and benefits
There are many proposed changes involving executive compensation and benefits. This blog does not address them.
This list of possible changes is not comprehensive, and the tax reform process is far from finished. The U.S. Senate released its companion bill on November 9, 2017. It differs from the House version. Before a tax reform bill could become law, the Senate and House would have to agree on and pass one version of the bill. If that happens, the tax reform bill they pass would be presented to the president for signature. The final bill would probably look quite different from the proposed bills.
Tax reform is far from over, but the process has started. Expect changes.
Lois Gleason, CEBS
Senior Information/Research Specialist at the International Foundation