United States: Impact Of The Tax Cuts And Jobs Act On Employee Benefits

On November 2, 2017, the U.S. House of Representatives Committee on Ways and Means unveiled its long-anticipated tax reform legislation – the Tax Cuts and Jobs Act (the "Act"). In addition to containing a number of high-profile changes to the Internal Revenue Code (such as changes to individual income tax rates and the mortgage interest deduction), the Act also contains a number of changes that will impact the compensation and benefit plans of employers.

The proposed changes would impact the full scope of employer plans, including qualified retirement plans, health and welfare plans, and nonqualified deferred compensation plans. This Alert will analyze the proposed changes and, unless otherwise noted in the chart below, all noted changes would go into effect for taxable years beginning in 2018.

Provision Current Law Proposed Changes
Nonqualified Deferred Compensation (Code Section 409A) Subject to compliance with Code Section 409A, nonqualified deferred compensation is not taxable until the year received – and the employer's deduction is also delayed until that time. This is true even if the deferred compensation is vested and no longer subject to a substantial risk of forfeiture. An employee would be taxed on compensation as soon as there is no longer a substantial risk of forfeiture with regard to that compensation. The provision would be effective for amounts attributable to services performed after 2017. The current Code Section 409A rules would continue to apply to existing nonqualified deferred compensation arrangements until the last tax year beginning before 2026, when such arrangements would become subject to the provision.
Limitation on Excessive Compensation (Code Section 162(m)) A corporation generally may deduct compensation expenses as an ordinary and necessary business expense. The deduction for compensation paid or accrued with respect to a "covered employee" of a publicly traded corporation, however, is limited to no more than $1 million per year. The limitation applies to all remuneration paid to a covered employee, subject to several significant exceptions: (1) commissions, (2) performance-based remuneration, including stock options, (3) payments to a tax-qualified retirement plan and (4) amounts that are excludable from gross income.

For IRS purposes, a covered employee is defined as the principal executive officer and the three highest compensated officers as of the close of the tax year.
The exceptions to the $1 million deduction limitation for commissions and performance-based compensation would be repealed.

The definition of "covered employee" would include the CEO, the chief financial officer and the three highest paid employees.

In addition, once an employee qualified as a covered employee, the deduction limitation would apply to that individual so long as the corporation continues to pay remuneration.
Excise Tax on Excessive Tax-Exempt Organization Executive Compensation While the Code limits (1) the deduction for publicly traded corporations for compensation paid to covered employees to no more than $1 million per year under Code Section 162(m) and (2) the deductibility of certain severance-pay arrangements under Code Section 280G, no parallel limitations apply to tax-exempt organizations with respect to executive compensation and severance payments. A tax-exempt organization would be subject to a 20% excise tax on compensation in excess of $1 million paid to any of its five highest paid employees for the tax year. The excise tax would apply to all remuneration paid to a covered person for services, except for payments to a tax-qualified retirement plan and amounts that are excludable from the executive's gross income.

Once an employee qualifies as a covered person, the excise tax would apply to compensation in excess of $1 million paid to that person so long as the organization continues to pay remuneration.

The 20% excise tax would also apply to excess parachute payments paid to such covered persons. Under the proposal, an excess parachute payment generally would be a payment contingent on the employee's separation from employment with an aggregate present value of three times the employee's base compensation.
Qualified Tuition Reductions Qualified tuition reductions provided by educational institutions to their employees, spouses or dependents are excluded from income. The exclusion for qualified tuition reduction programs would be repealed.
Employer-Provided Education Assistance Employer-provided education assistance is excluded from income in an amount up to $5,250 per year. The exclusion for employer-provided education assistance programs would be repealed.
Medical Savings Accounts Above-the-line deduction available for contributions to Archer Medical Savings Account (MSA) and exclusion from income for employer contributions to an MSA. No deduction allowed for MSA contributions and employer contributions would not be excluded from income.
Employer-Provided Housing Housing and meals provided to an employee for the convenience of the employer are excluded from income if the meals are on the business premises of the employer and the employee is required to accept lodging on the premises of the employer as a condition of employment. The exclusion for housing provided for the convenience of the employer and for employees of educational institutions would be limited to $50,000 ($25,000 for a married individual filing a joint return) and would phase out for highly compensated individuals.
Employee Achievement Awards Employee achievement awards are excluded from income, provided they are given in recognition of length of service or safety achievement at a ceremony that is a meaningful presentation. Such employee achievement awards would constitute taxable compensation to the recipient.
Dependent Care Assistance Programs The value of employer-provided dependent care assistance programs are excluded from employees' income up to a limit of $5,000 per year ($2,500 for married filing separately) to help pay for work-related expenses of caring for a child under the age of 13 or spouses or other dependents who are physically or mentally unable to care for themselves. The exclusion for dependent care assistance programs would be repealed.
Qualified Moving Expense Reimbursement Qualified moving expense reimbursements provided by an employer are excluded from the employee's income. The exclusion for qualified moving expense reimbursements would be repealed.
Adoption Assistance Programs Adoption assistance programs that make payments of qualified adoption expenses from an employer to an employee are excluded from the employee's income up to certain IRS limits. The exclusion for payments under adoption assistance programs would be repealed.
Re-characterization of Roth IRA Contributions An individual may re-characterize a contribution to a traditional IRA as a contribution to a Roth IRA (and vice versa). The deadline is generally October 15 of the year following the conversion. The rule allowing re-characterization of IRA contributions and conversions would be repealed.
Allowable In-Service Distributions Defined contribution plans generally are not permitted to allow in-service distributions if the employee is less than 59½ years old. For defined benefit plans (as well as state and local government defined contribution plans), the restriction applies if the employee is less than age 62. All defined benefit plans, as well as state and local government defined contribution plans, would be permitted to make in-service distributions beginning at age 59½.
Hardship Distributions Treasury regulations require that plans not allow employees taking hardship distributions to make contributions to the plan for six months after the distribution.

Hardship distributions may be allowed only for amounts actually contributed by the employee and may not include account earnings or amounts contributed by the employer.
The IRS would be required within one year to change its guidance to allow employees taking hardship distributions to continue making contributions to the plan.

Employers may choose to allow hardship distributions to also include account earnings and employer contributions.
Extended Rollover Period for Plan Loan Offset Amounts If a plan terminates or an employee's employment terminates while a plan loan is outstanding, the employee has 60 days to contribute the loan balance to an IRA, or the loan is treated as a distribution (subject the 10% penalty for early withdrawals). Employees whose plan terminates or who separate from employment while they have plan loans outstanding would have until the due date for filing their tax return for that year to contribute the loan balance to an IRA in order to avoid the loan being taxed as a distribution.
Modification of Nondiscrimination Rules For employers sponsoring both a defined contribution plan and a defined benefit plan, the nondiscrimination rules allow limited cross-testing between the two plans. However, some employers who allow current workers to continue to accrue benefits but have closed their defined benefit plan to new employees come to violate the nondiscrimination rules. Expanded cross-testing between an employer's defined benefit and defined contributions would be allowed for purposes of the nondiscrimination rules, effective as of the date of enactment.

As we saw with the various pieces of legislation that the House of Representatives introduced with respect to healthcare reform earlier this year, the introduction of the Act by no means guarantees that the above summarized provisions will go into effect. However, the Act does show that significant changes will be necessary to an employer's compensation and benefit plans if tax reform is ultimately signed by President Trump. Some of the these changes would be minor, such as changes to the hardship rules under a company's 401(k) plan; however, other changes would be extremely significant, such as the changes to nonqualified deferred compensation and the adoption of public company-like rules for the top employees of tax-exempt organizations.

Attorneys in the Employee Benefits and Executive Compensation Practice Group at Duane Morris will continue to monitor these tax reform developments and assist employers with respect to any changes necessary.

For Further Information

If you have any questions about this Alert, please contact any of the attorneys in our Employee Benefits and Executive Compensation Practice Group or the attorney in the firm with whom you are regularly in contact.

Disclaimer: This Alert has been prepared and published for informational purposes only and is not offered, nor should be construed, as legal advice. For more information, please see the firm's full disclaimer.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
Akin Gump Strauss Hauer & Feld LLP
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Akin Gump Strauss Hauer & Feld LLP
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions