The passage of the 2017 Tax Cuts and Jobs Act (“Act”) on December 22, 2017 has brought the most significant change to the Internal Revenue Code since 1986. These changes have affected many components of our tax code including employee benefit plans and taxable fringe benefits.
In addition to the repeal of the individual shared responsibility payment that was assessed for a failure to maintain minimum essential health coverage and revised tax and withholding tables, the Internal Revenue Service (“IRS”) has also provided a federal employer tax credit for paid family and medical leave. In addition, the IRS has incorporated changes pertaining to the deductibility of meals and entertainment expenses and fringe benefits such as transportation, employee achievement awards, moving expenses, unreimbursed business expenses, and other fringe benefits as they relate to unrelated business income and health savings account contribution limits.
The employer credit for family and medical leave is a general business credit that employers can claim based on wages paid to qualifying employees during family and medical leave, subject to certain conditions. It is only available for a limited time; for the two-year period from January 1, 2018 to December 31, 2019.
In order to be eligible for the credit, employers must have a formal written policy in place that annually includes at least two weeks of paid family and medical leave to all qualifying employees. This includes full-time employees and part-time/prorated employees. The compensation for this paid leave must be more than 50% of the wages normally paid to the qualifying employee.
A qualifying employee is any employee who worked for the employer for one year or more and who, in the previous year, had compensation that did not exceed a certain threshold. For 2018, the employee must not have earned more than $72,000 in 2017.
To be eligible for the credit, family and medical leave must be for one of the following reasons:
If an employer provides any other type of personal time off or vacation other than above or any leave paid by a state or local government as required by law, it will not be considered for this credit.
The credit is a percent of the wages paid to a qualifying employee while on leave for up to 12 weeks per year. The minimum percent is 12.5% and is increased by .25% for each percentage point exceeding 50% of the employees’ wages up to a maximum of 25%. The employer must reduce their deduction for wages by this credit.
Please note that the IRS is expected to issue further guidance addressing such questions as when the written policy must be in place, how this paid leave relates to other paid leave, a clearer definition of “employed for one year or more”, the impact of state and local leave, and controlled group application.
Prior to the Act, meals and entertainment expenses that were substantiated and directly associated with the active conduct of a trade or business were generally 50% deductible. Under the Act, there is no deduction allowed with respect to entertainment, regardless of business connection. Entertainment is defined as an activity considered to be for entertainment, amusement, or recreation, including entertaining at theaters, and sporting events. Business meals are still 50% deductible; however, further IRS guidance is expected regarding meals associated with entertainment.
In accordance with the de minimis fringe benefit rules, employers could deduct 100% of occasional meals under the old law. Under the Act, only 50% of these expenses are deductible. The same applies to meals provided for the convenience of an employer or associated with an employer-operated eating facility. After December 31, 2025, this deduction will be eliminated. Expenses incurred for recreational activities, including holiday parties and company outings, are still 100% deductible as long as they were open to all employees and not discriminatory in favor of highly compensated employees. Although the Act limits the employers’ deductions, the wage exclusions have not been affected and remain nontaxable to employees.
The Act also includes various additional exempt and taxable fring benefits to employees. Some of these are updated with the Act and others are remaining unchanged.
Although mass-transit and parking benefits will continue to be exempt from income tax to employees (up to $260 per month for 2018) via a pretax employer-sponsored plan, the Act eliminates the business deduction for employers for these expenses, unless provided for ensuring the safety of an employee. The benefit previously available for biking (up to $20 per month) has been suspended from 2018 through 2025. Employer reimbursements for bicycle commuting expenses must be included in an employees’ taxable wages as of January 1, 2018.
Under the old law, employers could deduct up to $400 of the cost of an employee achievement award of tangible personal property. A higher limit of $1,600 applies to a qualified plan but must not discriminate in favor of highly compensated employees and is subject to further limitations. These awards include length of service awards or safety awards given during a meaningful presentation and should not be disguised compensation. The Act states that these awards are still deductible but effective in 2018, expands the definition of tangible personal property to exclude cash, gift cards, most gift certificates, vacations, meals, lodging, theater or sporting event tickets, stocks, bonds and other similar items.
Qualified moving expenses have been eliminated for both employer deductions and wage exclusion for the years 2018 through 2025. An exception is available to certain active duty members of the Armed Forces.
Under the old law, unreimbursed business expenses were deductible by employees as a miscellaneous itemized deduction, subject to a limitation of 2% of adjusted gross income. The Act does not allow for personal miscellaneous itemized deductions beginning January 1, 2018. If an employer reimburses an employee for business expenses, the reimbursement is not taxable to the employee, but if the employer does not reimburse the employee for their business expenses, the employee will not be able to claim a tax deduction for these expenses.
The deduction for qualified transportation fringe benefits, qualified parking, onsite gyms, and other athletic facilities was repealed and is considered unrelated business taxable income for tax-exempt organizations.
The Act decreased the maximum family deductible contribution from $6,900 to $6,850. The IRS subsequently released Revenue Procedure 2018-27 on April 26, 2018, announcing relief for taxpayers to allow the $6,900 limitation to remain in effect for 2018.
Employers must continue to monitor benefits provided to ensure compliance with the Act and to continually revisit their offerings. As with any new legislation, there are questions that will require additional guidance from the IRS, which we are expecting to be released in the near future. In addition, compliance efforts must be made in accordance with state and local implications.