United States: What Every Employer Needs To Know About The Tax Reform Law

Last Updated: March 2 2018
Article by Melissa Shimizu and Jeffrey D. Smith

Late last year, Congress passed the Tax Cuts and Jobs Act (the "Act") and it was quickly signed by the President. The Act seeks to reform the current tax system and contains numerous provisions that may be significant to employers:

Health Care Coverage: ACA Individual Mandate

Without the individual mandate, it is likely that fewer individuals will purchase health insurance from the Marketplace. Only those who are the sickest will continue to purchase insurance. Since those individuals will incur more claims, the cost of premiums will likely increase.

The Act does not address the employer mandate, meaning it is still in effect and any compliance and reporting efforts should be continued.

Retirement Plans

Recharacterization Of Roth Rollover Contributions

If your retirement plan permits the recharacterization of Roth contributions, you may need to revise your plan accordingly.

Plan Loan Offsets

If your plan permits loans, you may want to review your plan document and loan policy, if any, to see if it needs to be revised to allow for the additional time to rollover loan offsets.

Disaster Relief

If your retirement plan permits for disaster relief or you are preparing retroactive plan amendments, you should review those documents as well as any relevant distributions forms.

Employee Compensation

$1 Million Deduction Limit On Officers' Compensation

There is transitional relief for any compensation paid to covered individuals if the compensation is paid pursuant to a binding contract in effect on November 2, 2017, the terms of which were not materially modified on or after November 2, 2017. Any contracts "renewed" after November 2, 2017 will not qualify. Further, if any contract is terminable or cancelable unconditionally, it is treated as a new contract entered into on the date of the termination or cancellation. Employers may want to keep this in mind when negotiating or renewing contracts for compensation packages of certain officers.

Excise Tax For Compensation Over $1 Million At Tax-Exempt Organizations

Tax-exempt organizations may want to revisit contracts with certain employees or set aside additional funds in their budgets to cover excise taxes.

Qualified Equity Grants For Non-Public Companies

There must be a written plan which grants stock options or RSUs and covers at least 80 percent of full-time employees (other than excluded employees) working in the U.S. This requirement cannot be met by granting a combination of stock options and RSUs. Corporations must provide notice of grants to employees, and an excise tax will apply if the notice is not provided. There also will be new wage withholding rules to determine the time and rate of withholding on grants, rules for reporting, and rules for coordinating these grants with rules for incentive stock options, employee stock purchase plans, and deferred compensation (i.e., these grants are not subject to Code § 409A). If non-public employers grant employees stock options or RSUs, they should review the number of employees receiving this form of compensation. Also consider drafting notices for grants to avoid excise taxes. Such employers should also keep up with new withholding rules and oversee any reporting and withholding changes. 

Fringe Benefits

Suspension Of Certain Entertainment And Meal Deductions 

Employers who provide meals to employees may want to revisit whether employees value these perks since the employer will no longer be able to take a deduction for the full amount of meal, food, and beverage costs.

Suspension Of Transportation Deductions 

From 2018 to 2026, amounts for qualified bicycle commuting reimbursements are no longer excluded from employees' income, but employers will still be able to deduct those amounts. Employers providing qualified transportation fringe benefits need to consider the added cost of continuing to provide these benefits. If an employer is unsure whether to begin providing these benefits, they should factor into the decision the inability to take deductions on these amounts.

Fringe Benefits And Tax-Exempt Entities

Even though the amount of these benefits will be free of tax consequences for employees, tax-exempt entities should be aware of the additional unrelated business taxable income they will now have to report.

Employee Achievement Awards

There will no longer be an exception for many types of employee achievement awards, so employers should be aware of the potential tax consequences to the employees before providing achievement awards. For example, if the employer has a practice of giving employees gift cards on their employment anniversaries, employees will have to include the value of those gift cards in their taxable income.

Though employers may still offer moving expense reimbursements to employees, those amounts will need to be included in employees' incomes. Prior to the Act, moving expenses that were not accounted for were considered taxable income to employees. Now, even moving expenses that are accounted for will be considered taxable income, so employers may want to consider giving employees lump-sum moving stipends regardless of how much they actually spend moving, rather than employees submitting for reimbursement, in the interest of ease of administration and because employees will be taxed on the amounts anyway.

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.

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Melissa Shimizu
Jeffrey D. Smith
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