United States: What Notable Employment Provisions Are In The Tax Bill?

The first significant piece of legislation to make it to President Trump's desk, the Tax Cuts and Jobs Act (H.R. 1), includes an employer tax credit for providing paid family and medical leave, elimination of a business expense deduction related to nondisclosure agreements, repeal of the Affordable Care Act's (ACA) individual mandate, and changes to the tax treatment of certain employer-provided fringe benefits, among others. The massive tax bill merges separate measures the House and Senate passed in November and December, respectively, and was approved by both chambers—after some eleventh-hour amendments to Senate budget rules—on December 20, 2017. The bill is expected to be signed into law by President Trump.

Passage of the tax bill was the top legislative priority for congressional Republicans and the White House. Congressional leaders and the White House were committed to not repeating the failed effort to "repeal and replace" the ACA by enacting the first sweeping tax reform proposal in 30 years. Having accomplished this goal in a timeline that seemed overly ambitious at the onset, the task now turns to understanding and implementing the complex legislation. Although the bill includes notable provisions for employers, the legislation is also notable for employment and benefits related provisions that were not included in the final package.

Paid Family and Medical Leave Tax Credit

While several state and local governments have enacted paid leave-related bills over the years, federal legislation on this topic has failed to advance. The tax bill offers the first paid leave-related measure at the national level. The bill does not require employers to provide paid leave, but rather offers employers that provide a certain level of paid family and medical leave to their employees a tax credit as an incentive. The law creates a new section in the tax code, Employer Credit For Paid Family And Medical Leave.

How Much of a Credit is Offered?

Eligible employers will be able to claim a general business tax credit equal to 12.5% of the wages they pay to qualifying employees when they take family and medical leave. The credit is available only if the employer pays the employees on leave at least half of their hourly rate (or a prorated amount if they are not paid hourly), and only if the employer provides at least two weeks of paid family and medical leave per year. Employers that pay their employees on leave more than 50% replacement wages will be entitled to a greater tax credit. Specifically, the credit will increase by a quarter percentage point for every percent above the 50% rate the employer pays the employee on leave, up to a maximum tax credit of 25% if the employer pays the employees 100% of their regular wages. This credit is available for up to 12 weeks of paid leave per employee per year.

Which Employees Must Be Offered Paid Leave?

Both full-time and part-time employees must be offered paid leave for an employer to be able to claim the tax credit. Employers must allow part-time employees to take a commensurate amount of paid leave, determined on a pro-rata basis. A "qualifying employee" is an individual who is employed by the employer for at least a year, and paid no more than 60% of the compensation threshold for designation as a highly compensated employee under the tax code, or $72,000 (60% of $120,000, per Sec. 414(g)(1)(B) for 2017).

What Type of Leave Must Be Offered?

The tax credit applies for "family and medical leave," as defined under sections 102(a)(1)(a)-(e)or 102(a)(3) of the Family and Medical Leave Act. Other types of leave such as paid vacation leave, personal leave, or other types of medical or sick leave are not considered family and medical leave for tax credit purposes.

When Would This Leave Apply?

The credit would apply to wages paid in taxable years starting in 2018. The credit would not apply to wages paid in taxable years starting after December 31, 2019.

Sexual Harassment Nondisclosures

The increased awareness of sexual harassment claims has focused attention on nondisclosure agreements in harassment claims settlements. A desire to promote transparency regarding such claims is likely the impetus for Section 13307 of the bill: Denial of Deduction for Settlements Subject to Nondisclosure Agreements Paid in Connection With Sexual Harassment or Sexual Abuse.

The provision would amend section 162 of the tax code, which generally allows businesses to deduct certain ordinary and necessary expenses paid or incurred during the year as part of running the business, to provide the following exclusion:

PAYMENTS RELATED TO SEXUAL HARASSMENT AND SEXUAL ABUSE.

—No deduction shall be allowed under this chapter for—

(1) any settlement or payment related to sexual harassment or sexual abuse if such settlement or payment is subject to a nondisclosure agreement, or

(2) attorney's fees related to such a settlement or payment.

This exclusion will apply to amounts paid or incurred after the tax bill is enacted.

As a practical matter, this means employers will need to decide whether any amount paid to settle a sexual harassment claim is significant enough to be worth the deduction. If so, these employers should ensure their settlement agreements do not include nondisclosure agreements.

Nondeduction of Certain Penalty Amounts

The tax bill also amends Code section 162(f). The new provision denies deductibility for any otherwise deductible amount paid or incurred (whether by lawsuit, agreement, or otherwise) to or at the direction of a government or specified nongovernmental entity in relation to the violation of any law or the investigation or inquiry by such government or entity into the potential violation of any law. Previously, Code section 162(f) only denied a deduction to amounts actually paid to the government. An exception applies to payments that the taxpayer establishes are either restitution (including remediation of property) or amounts required to come into compliance with any law that was violated or involved in the investigation or inquiry, that are identified in the court order or settlement agreement as restitution, remediation, or required to come into compliance.

Therefore, if the government or government entity is a named party in the suit, amounts that do not represent restitution for actual damages (i.e., lost wages or recovery for pain and suffering) but represent a fine or penalty (i.e., treble or punitive damages) are no longer deductible even if paid directly to a plaintiff. Under prior law, these amounts were only nondeductible if paid directly to the government.

Repeal of the ACA Individual Mandate

The tax bill does, at least in part, what the ACA "repeal and replace" effort failed to do – repeal a cornerstone of the landmark health reform bill. Specifically, the tax bill eliminates the penalties for the ACA's individual mandate, the requirement that most individuals obtain health coverage or pay a penalty. Eliminating the individual mandate will serve to raise revenue to fund other provisions of the tax bill. While the tax bill eliminates the penalties for the ACA individual mandate, the associated employer mandate remains in effect. Both mandates were interrelated and envisioned to work in sync. The removal of the individual but not employer mandate penalties creates added challenge and uncertainty for employers facing enforcement of mandate penalties, onerous reporting requirements and the impending "Cadillac Tax" on employer-sponsored health coverage above a certain threshold. The Cadillac Tax is currently scheduled to become effective in 2020 unless Congress takes action to repeal or delay it. Calls for legislation to stabilize the individual health insurance market no doubt will become even louder in the wake of repeal of the individual mandate penalty. Although the removal of the individual mandate and fate of the individual insurance markets may not initially appear to be of importance to employers, the implications for employer-sponsored coverage are indeed significant.

Fringe Benefit Deductions and Exclusions

The new tax law makes some changes to which fringe benefits can be deducted as a business expense. Specifically, the bill amends section 274 of the Tax Code to provide that deductions are not allowed for "(1) an activity generally considered to be entertainment, amusement or recreation, (2) membership dues with respect to any club organized for business, pleasure, recreation or other social purposes, or (3) a facility or portion thereof used in connection with any of the above items."

According to the conference report, this provision:

repeals the present-law exception to the deduction disallowance for entertainment, amusement, or recreation that is directly related to (or, in certain cases, associated with) the active conduct of the taxpayer's trade or business (and the related rule applying a 50 percent limit to such deductions).

This section also removes the deduction associated with an employer's providing ordinary commuter benefits to employees.

Employers are still permitted to generally deduct 50% of the food and beverage expenses associated with operating their trade or business, such as meals consumed by employees while on work travel. As explained by the conference report, "for amounts incurred and paid after December 31, 2017 and until December 31, 2025, the provision expands this 50% limitation to expenses of the employer associated with providing food and beverages to employees through an eating facility that meets requirements for de minimis fringes and for the convenience of the employer."

The new tax law also removes the exclusion from employees' wages for employer-reimbursed bicycle commuting costs, moving expenses and length of service/safety achievement awards.

Littler tax counsel will be hosting a webinar on January 30, 2018 to discuss these changes in detail.1

Footnotes

1 Information on this webinar will become available on Littler's Events calendar.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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
Michael J. Lotito
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