United States: Senate Passes Tax Cuts And Jobs Act With Changes In Employee Benefits

In the early morning hours of December 2, 2017, the Senate passed the long-anticipated tax reform legislation – the Tax Cuts and Jobs Act (the Act). The Act was previously passed in the House of Representatives on November 16, 2017 (see our prior Alert on the initial House legislation). While passage in the Senate is a significant milestone, the two differing versions of the Act will need to be reconciled by the Senate and the House in the coming weeks. Once that is completed, the Act will be presented to President Trump to sign into law. The Act represents the most significant reform of the Internal Revenue Code since the Tax Reform Act of 1986.

As with the initial House proposal, the Act passed by the Senate impacts the full scope of employer plans – including qualified retirement plans, health and welfare plans and nonqualified deferred compensation plans. This Alert will analyze the changes set forth in the Act passed by the Senate as compared to the initial legislation proposed in the House and, unless otherwise noted in the chart below, all noted changes would go into effect for taxable years beginning in 2018.

Provision Initial House Bill Senate Bill

Nonqualified Deferred Compensation (Code Section 409A)

An employee would be taxed on compensation as soon as there is no longer a substantial risk of forfeiture with regard to that compensation (including stock options). The provision would be effective for amounts attributable to services performed after 2017.

None – the changes to Code Section 409A have been deleted in their entirety. The existing nonqualified deferred compensation rules remain in effect.

Limitation on Excessive Compensation (Code Section 162(m))

The exceptions to the $1 million deduction limitation for commissions and performance-based compensation would be repealed.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.

The definition of employers subject to Code Section 162(m) extended to any employer required to file reports under section 15(d) of the Securities Exchange Act of 1934.

Same as proposed House bill, but Senate bill includes a transition rule under which the changes would not apply to compensation under a written binding contract in effect on November 2, 2017, and which was not materially modified after that date in any material aspect.

Excise Tax on Excessive Tax-Exempt Organization Executive Compensation

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.

Same as House bill.

Qualified Equity Grants

Not included in original House bill.

Allows private companies to offer certain employees the opportunity to defer income tax inclusion on compensatory stock options or restricted stock units (RSUs) for up to five years, provided certain requirements in new Code Section 83(i) are met. The company must have a written plan under which at least 80% of all employees providing services to the company in the U.S. are granted qualified stock under the provision.

The special deferral rule is not available to 1% owners, current or former CEOs and CFOs (including their family members), or certain highly compensated officers who were one of the four highest paid officers for any of the 10 preceding taxable years.

Provides for a reasonable good faith transition period for the application of the 80% and employer notice requirements.

Individual Shared Responsibility Provision ("Individual Mandate")

Not included in the original House bill.

Reduces the Affordable Care Act penalty for not purchasing creditable insurance coverage to zero, effective beginning in 2019.

Qualified Tuition Reductions

Repeal the exclusion from income for qualified tuition reductions provided by educational institutions to their employees, spouses or dependents.

None – the changes to qualified tuition reductions have been deleted in their entirety. The existing rules remain in effect.

Employer-Provided Education Assistance

Repeal the exclusion from income for employer-provided education assistance in an amount up to $5,250 per year.

None – the changes to employer-provided education assistance have been deleted in their entirety. The existing rules remain in effect.

Medical Savings Accounts

Disallow the above-the-line deduction available for contributions to Archer Medical Savings Accounts (MSAs) and the exclusion from income for employer contributions to an MSA.

None – the changes to MSAs have been deleted in their entirety. The existing rules remain in effect.

Employer-Provided Housing

Limit the exclusion for housing provided for the convenience of the employer and for employees of educational institutions to $50,000 ($25,000 for a married individual filing a joint return) and phase out for highly compensated individuals.

None – the changes to the taxation of employer-provided housing have been deleted in their entirety. The existing rules remain in effect.

Employee Achievement Awards

Repeal the exclusion from income for employee achievement awards.

None – the changes to the taxation of employee achievement awards have been deleted in their entirety. The existing rules remain in effect.

Dependent Care Assistance Programs

Repeal the exclusion from income of the value of employer-provided dependent care assistance programs up to a limit of $5,000 per year ($2,500 for married couples 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.

None – the changes to dependent care assistance programs have been deleted in their entirety. The existing rules remain in effect.

Qualified Moving Expense Reimbursement

Repeal the exclusion from income for qualified moving expense reimbursements provided by an employer.

Same as House bill, but provides exception or members of the U.S. Armed Forces on active duty who move pursuant to a military order.

Adoption Assistance Programs

Repeal the exclusion from income for adoption assistance programs that make payments of qualified adoption expenses up to certain IRS limits.

None – the changes to the taxation of adoption assistance programs have been deleted in their entirety. The existing rules remain in effect.

Re-characterization of Roth IRA Contributions

Repeal the ability of an individual to 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.

Same as House bill.

Allowable In-Service Distributions

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 59 ½.

None – the changes to in-service distributions have been deleted in their entirety. The existing rules remain in effect.

Hardship Distributions

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.

None – the changes to hardship distributions have been deleted in their entirety. The existing rules remain in effect.

Extended Rollover Period for Plan Loan Offset Amounts

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.

Same as House bill.

Modification of Nondiscrimination Rules

Expand 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.

None – the changes to nondiscrimination testing rules have been deleted in their entirety. The existing rules remain in effect.

The Act will significantly reform the Internal Revenue Code, including in the areas related to an employer's compensation and benefit plans. Some of these changes are minor, such as the removal of qualified moving expense reimbursements as a tax-free benefit. However, other changes would be extremely significant, such as the changes to the deductibility of compensation in excess of $1 million to covered employees under Code Section 162(m) and the adoption of public company-like rules for the top employees of tax-exempt organizations. With respect to tax-exempt organizations, they are encouraged to examine their current compensation programs to identify and address any issues related to the receipt of compensation in excess of $1 million in a given taxable year and any potential parachute payments in connection with a termination of employment.

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
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
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