Repeal of the Individual Mandate
On December 22, 2017, the President signed into law the new tax reform package. The bill eliminates the individual mandate formerly required by the Patient Protection and Affordable Care Act, also known as Obamacare, by reducing the penalty for failure to carry coverage to zero. This provision is effective for the tax year beginning January 2019.
For the 2017 tax year, the Internal Revenue Code (“Code”) allows employees to use pre-tax dollars, and for employers to deduct the cost, for certain transportation fringe benefits, although limitations do apply. For example, the pre-tax dollar amount and the deduction that an employer can utilize is limited to $255 per employee per month for certain transportation expenses. Employees can use pre-tax dollars and an employer can deduct up to $255 per employee per month for parking expenses. Also, employees can exclude from gross income qualified bicycle commuting reimbursements of up to $20 per month.
Under the new tax bill that recently passed in Congress, employees will still be able to use pre-tax dollars for qualified mass transit and parking benefits. However, the bill eliminates the deductions that employers are able to take advantage of for the same qualified mass transit and parking benefits. The tax bill does retain an exception to this rule in the event that such an expense is necessary for ensuring the safety of an employee. Moreover, the new tax law disallows the qualified bicycle commuting reimbursement exclusion.
Deduction Limitation on Excessive Employee Compensation
Prior to the new tax bill, publicly traded companies were generally not allowed to deduct reasonable compensation in excess of $1 million. However, a few exceptions existed to permit a compensation deduction in excess of $1 million. Under the new provisions of the Code those exceptions are eliminated. As a consequence, publicly traded companies are permitted a deduction for reasonable and necessary compensation up to $1 million in all cases.
Tax-Exempt Executive Compensation
For tax years beginning on January 1, 2018 tax-exempt organizations should monitor executive compensation more closely. The new rule provides for the imposition of a 21% tax that is applied to the amount of remuneration paid to a covered employee that exceeds $1 million. The 21% tax is also applied to certain excess parachute payments paid to any employee. The Code provides the specific definitions of what constitute a covered employee and excess parachute payments.
Qualified Equity Grants
The new tax bill allows certain employees to elect to defer taxation for up to five years on either stock options or restricted stock units that are granted to employees. This provision includes a number of requirements and nuances, including that the employer must have a written plan that states at least 80% of the company’s employees will be granted stock options or restricted stock units with the same rights and privileges. Also, certain owners and officers are excluded from those employees eligible to make such an election.
Recharacterization of Individual Retirement Account Contributions
Contributions to individual retirement accounts (“IRAs”) can be recharacterized from an IRA contribution to a Roth IRA contribution and vice versa, known as a conversion contribution. Certain requirements must be satisfied to complete a conversion contribution. This proposition was the law prior to the passage of the new tax bill and remains the law after the passage of the new tax bill. The change in law asserts that the permissive conversion contribution cannot be used to effectively unwind Roth IRA conversions. Therefore, if an individual completes a conversion contribution to a Roth IRA, that person cannot then complete a second conversion contribution to “undo” the Roth IRA recharacterization.
Paid Leave Credit for Employers
The new tax bill inserts a federal tax credit for employers that decide to provide paid family and medical leave to employees. Essentially, all eligible employers are able to claim a general business tax credit that is equal to 12.5% of wages paid to qualifying employees on family and medical leave. In addition the payment rate must be equal to at least 50% of the wages normally paid to the employee. This provision will end after 2019, unless renewed by Congress.
Defined Contribution Retirement Plans
Certain defined contribution plan participants are permitted to take loans from 401(k) accounts. If a participant fails to pay back an outstanding loan within sixty days of departing his or her employ that participant is considered to have defaulted on that loan. In addition, the outstanding loan amount is considered a taxable withdrawal. However, the participant can avoid this treatment if the participant contributes the outstanding loan amount to an individual retirement account or another qualified plan within sixty days of the participant’s departure. The new tax bill extends the sixty day deadline to the latest date on which the participant can file his or her tax return for the year in which the loan default occurred (including tax return extensions).
Under current law, employers can deduct the cost of employee achievement awards up to $400 for tangible personal property. The Internal Revenue Service (“IRS”) has identified employee achievement awards as including length of service awards, safety awards, and awards given during meaningful presentations. Similarly, a limitation of $1,600 applies to qualified plan awards. More limitations accompany the provision of qualified plan awards. The new tax bill provides that tangible personal property is still deductible by the employer. However, the definition of “tangible personal property” excludes cash, cash equivalents, gift cards, gift coupons, gift certificates, vacations, meals, lodging, tickets to theatre or sporting events, stock, bonds, securities, or other similar items.
Miscellaneous Fringe Benefits
- Moving Expenses. The new tax bill eliminates the employer deduction and the employee exclusion from gross income all amounts attributable to moving expenses. However, a deduction and exclusion is still available for certain active military members.
- Onsite Gyms. The cost of on-premises workout facilities is no longer deductible under the new tax legislation.
- Businesses will no longer be able to deduct expenses associated with employee meals. The tax bill expands the fifty percent deduction limit on de minimis fringe benefits to on-site eating facilities, but only until December 2025.
- Entertainment, Amusement, and Recreation. Under the Code prior to 2018, an employer was permitted to deduct costs associated with recreational, social, or similar activities. The new tax bill disallows this deduction.
For questions relating to how the tax reform bill may impact your business, contact Davenport Evans employment lawyers at 605-336-2880 or [email protected].
Davenport, Evans, Hurwitz & Smith, LLP, located in Sioux Falls, South Dakota, is one of the State’s largest law firms. The firm’s attorneys provide business and litigation counsel to individuals and corporate clients in a variety of practice areas. For more information about Davenport Evans, visit www.dehs.com.