President Trump signed the Tax Cuts and Jobs Act into law on December 22, 2017. Fortunately for many employers and employees, several of the major changes contained in the House bill were dropped from the final bill before enactment. However, there are some significant changes in the Act that will affect many employers and employees, including the following:
- Deduction Limit for Public Companies. Public companies generally cannot deduct more than $1M in compensation paid to their top officers each year. The Act eliminates the exception for performance-based compensation that previously applied for purposes of the limit, and expands the group of officers affected by the limit to include the CEO, CFO and next three highest paid officers.
- Qualified Equity Grants. The Act will allow non-executives of private companies to elect to defer tax for up to five years after exercise of an option or settlement of a restricted stock unit. There are a number of conditions that must be satisfied for a company to offer this new benefit, including a requirement that the company grant options or RSUs to at least 80% of its employees.
- Extended Rollover for Retirement Plan Loans. The period for an eligible employee to either repay a plan loan or contribute the loan balance to an IRA to avoid taxation of the loan amount is extended from 60 days to the due date for the employee’s tax return for the applicable year. An eligible employee is an employee who terminated employment or was covered by a terminating plan.
- Excise Taxes on Tax-Exempt Employers. Tax-exempt employers will be subject to a 21% excise tax on annual compensation in excess of $1M paid to any of their five highest-paid officers, including contributions to qualified retirement plans, vested nonqualified deferred compensation, and certain other forms of exempt income. Compensation paid to doctors is excluded from the excise tax. Golden parachute payments to an employee in excess of three times the employee’s average W-2 income will also be subject to a 21% excise tax. The Act treats also treats funds used by tax-exempt employers to provide transportation fringe benefits and athletic facilities to employees as unrelated business income.
- Qualified Transportation Benefits. Employers can no longer deduct the costs to provide tax-free transit or parking benefits to their employees. These benefits will remain tax-free for employees, however, and employees can continue to pay for their transit and parking expenses with pre-tax payroll deductions. Reimbursements for bicycle commuting expenses will no longer be deductible for employers or tax-free for employees.
- Employer Credit for Paid Family and Medical Leave. The Act creates a tax credit for employers for wages paid to employees on FMLA leave, provided the payment rate is at least 50% of the employees’ normal wages. The credit starts at 12.5% of wages and increases to a maximum of 25% of wages based on the percentage of wages paid to the employees while on leave.
- Meals and Entertainment. The Act eliminates or reduces the deductions employers can take for meals, entertainment, gyms and other recreation facilities provided to employees, although these items remain tax-free for the employees.
- Moving Expenses and Achievement Awards. The Act repeals the deduction for employers and the exclusion for employees for moving expenses, and requires that employee achievement awards be paid in forms other than cash to be excludible.
- Flow-Through Entities. A new deduction of up to 20% of qualified business income is available to owners of flow-through entities (S corporations, LLCs, and partnerships), which corresponds to the tax cut C corporations are receiving under the Act. There are several limitations and restrictions that apply to this new deduction, including a cap for law, accounting, health care, consulting, brokerage, and other service businesses, but this change is expected to create many planning opportunities as taxpayers look for ways to convert compensation income to qualified business income.
- Retained Benefits. The proposals in the House bill to eliminate or reduce the benefits for 401(k) plans, nonqualified deferred compensation plans, dependent care assistance plans, adoption assistance plans, and educational assistance plans were not included in the final bill, and the prior rules for those benefits will remain largely intact.
Most of the above changes became effective on January 1, but some of them are subject to special effective dates, grandfather rules, and transition rules. Employers should review their benefit plans and programs and decide whether they want to make any modifications due to these tax law changes.
Please contact Charlie Berquist or Libby Davydov if you would like to discuss any of these changes and/or how best to implement them.