This article lists the primary changes triggered by the Tax Cuts and Jobs Act that have an impact on employee benefit plans. They are listed here roughly in the order of impact on small business employers. For example, health benefits changes and work-related travel changes at the top of the list impacts most businesses, whereas compensation above $1 million, farther down the list, affects fewer businesses.
- The tax penalty for individuals not covered by a specific type of required health insurance (called “minimal essential coverage” under the Affordable Care Act) is eliminated beginning January 1, 2019 (consider that Massachusetts and New Jersey residents still have similar state requirements with tax penalties). This means that small business employers can offer other types of group or individual health insurance without tax detriment to employees.
- Employee business expense deductions (work-related travel, licenses, uniforms, home office use, etc.) are no longer allowed as tax deductions for the individual. However, many of these retain their tax advantages when handled as employer expenses through an accountable reimbursement plan and through a voluntary salary reduction employer- sponsored cafeteria benefit plan.
- Employer tax deduction is disallowed for entertainment, amusement, or recreation activities. (There are exceptions).
- Employer-provided transportation benefits are no longer tax deductible to employers. Nonprofit employers are now taxed on these commuter benefits provided to employees. (However, tax-favored treatment is still allowed under voluntary salary reduction plans),
- Employer tax deduction is disallowed for executive transportation (like limo service) services under new IRC Section 274(l).
- Bicycle commuting benefits are no longer tax-free to employees.
- Certain “De minimis” commuter benefits are now tax-free.
- Beginning in 2026, the deduction for employee meals for on-site cafeterias and deductions for meals furnished for the employer’s convenience on the employer’s business premises is eliminated completely.
- Employee achievement awards that include cash or a gift certificate are taxable to employees.
- Moving expense benefits are taxable to employees.
- An employer tax credit is available for family and medical leave.
- Exercise of stock options by non-owner employees of non-public companies under a stock ownership plan that covers 80% of employees is tax-deferred under a new Section of the Revenue Code 83(i).
- 401(k) plan loans to terminated employees can be rolled over to IRAs up until the due date of the next tax return.
- Executive compensation above $1 million is not deducible for public companies and subject to an excise tax in nonprofit companies.
- Excessive severance benefits paid by a nonprofit company are subject to an excise tax.
Almost half of all employers are already considering changes to their employee benefit plans in response to the new law. Not all benefit plan changes underway are a direct response to the tax law. Some of the change incorporates other marketplace trends.
Among the employee benefit plan changes most likely to be adopted by smaller firms are:
a) redesign of employee health plan options,
b) financial planning, tax and compensation planning as an employee benefit,
c) expansion of student loan assistance programs, and
d) automatic enrollment in retirement savings plans.
I would be pleased to discuss any of these ideas with your or your group.