Tax Cuts and Jobs Act Includes Employee Benefits Changes and Elimination of ACA Individual Mandate Penalty

The Tax Cuts and Jobs Act, which the President signed into law on December 22, 2017 enacts significant tax reforms that include a number of employee benefits changes. Significant employee benefits changes include:

Individual Mandate Repeal. 

Effective in 2019, the Act will reduce to zero the individual shared responsibility (individual mandate) penalty. This will inevitably lead to more people deciding not to purchase health insurance. Coupled with guaranteed issue, which remains the law, this will contribute to the potential “death spiral” in the individual insurance market.

Extended Rollover Period for Qualified Plan Loans. 

If a participant’s account balance in a qualified retirement plan is reduced to repay a plan loan and the amount of that offset is considered an eligible rollover distribution, the offset amount can be rolled over into an eligible retirement plan. Under current law, the  rollover must occur within 60 days. The legislation extends the 60-day deadline until the due date (including extensions) for the participant’s tax return for the year in which the amount is treated as distributed. Plan loan offset amounts qualifying for this extended deadline are limited to loan amounts that are treated as distributed solely by reason of either termination of the plan or failure to meet the loan’s repayment terms because of a severance from employment.

New Employer Tax Credit for Paid Family and Medical Leave. 

The Act creates a new tax credit for eligible employers providing paid family and medical leave to their employees. To be eligible, employers must have a written program that pays at least 50% of wages to qualified employees for at least two weeks of annual paid family and medical leave.

Eligible employers paying 50% of wages may claim a general business credit of 12.5% of wages paid for up to 12 weeks of family and medical leave a year. The credit increases to as much as 25% if the rate of payment exceeds 50%. The provision is generally effective for wages paid in taxable years beginning after December 31, 2017, and before January 1, 2020. Leave provided as vacation, personal leave, or other medical or sick leave is not considered to be family and medical leave eligible for this credit.

Moving Expense Deduction Eliminated. 

For an eight-year period starting in 2018, most employees will not be able to exclude qualified moving expense reimbursements from income or deduct moving expenses. During that period, the exclusion and deduction are preserved only for certain members of the Armed Forces on active duty who move pursuant to a military order.

Qualified Transportation Plans Eliminated. 

The Act eliminates the employer deduction for qualified transportation fringe benefits and, except as necessary for an employee’s safety, for transportation, payments, or reimbursements in connection with travel between an employee’s residence and place of employment.

The tax exclusion for qualified transportation fringe benefits is generally preserved for employees, but the exclusion for qualified bicycle commuting reimbursements is suspended and unavailable for tax years beginning after 2017 and before 2026.

Other Fringe Benefits Deductions Eliminated. 

Effective for amounts paid or incurred after 2017, the Act repeals the rule under Code § 274 that previously allowed a partial deduction for certain entertainment, amusement, and recreation expenses (including expenses for a facility used in connection with such activities) if those expenses are sufficiently related to or associated with the active conduct of the taxpayer’s business.

Also, effective after 2017, the deductibility of employee achievement awards is limited by a new definition of “tangible personal property” that denies the deduction for cash, cash equivalents, and gift cards, coupons, or certificates, except when employees can only choose from a limited array pre-selected or pre-approved by the employer.

Other nondeductible awards include—vacations, meals, lodging, theater or sports tickets, and securities.

Inflation Adjustments. 

Beginning in 2018, many dollar amounts in the Code—including some benefit-related amounts—that are currently adjusted for inflation using the Consumer Price Index for All Urban Consumers (“CPI-U”) will instead be adjusted using the Chained Consumer Price Index for All Urban Consumers (“C-CPI-U”). According to the Bureau of Labor Statistics (which determines and issues the CPI), the C-CPI-U is a closer approximation to a true cost-of-living index for most consumers, and it tends to increase at a lower rate than the CPI-U.

IRS Notice 2017-67 Provides Guidance On Qualified Small Employer Health Reimbursement Arrangements

IRS Notice 2017-67 provides guidance on the requirements for providing  qualified small employer health reimbursement arrangement (QSEHRA) under section 9831(d) of the Internal Revenue Code (Code), the tax consequences of the arrangement, and the requirements for providing written notice of the arrangement to eligible employees.

The guidance in Notice 2017-67 includes sections on the following topics:
A. Eligible employer
B. Eligible employee
C. Same terms requirement
D. Statutory dollar limits
E. Written notice requirement
F. MEC requirement
G. Proof of MEC requirement
H. Substantiation requirement
I. Reimbursement of medical expenses
J. Reporting requirement
K. Coordination with PTC
L. Failure to satisfy the requirements to be a QSEHRA
M. Interaction with HSA requirements
N. Effective date

In addition, Executive Order 13813 (82 Fed. Reg. 48385, Oct. 17, 2017), directed the Secretaries of the Treasury, Labor, and Health and Human Services to consider revising guidance, to the extent permitted by law and supported by sound policy, to increase the usability of health reimbursement arrangements (HRAs), expand employers’ ability to offer HRAs to their employees, and to allow HRAs to be used in conjunction with non-group coverage. The guidance provided in Notice 2017-67 addresses each of those objectives. The Treasury Department and IRS are expected to issue additional guidance in the future in response to Executive Order 13813.

Background on QSEHRAs

The 21st Century Cures Act (Cures Act), P.L. 114-255, 130 Stat. 1033, was enacted on December 13, 2016. Section 18001 of the Cures Act amends the Code, the Employee Retirement Income Security Act of 1974 (ERISA), and the Public Health Service Act (PHS Act), to permit an eligible employer to provide a QSEHRA to its eligible employees.

Pursuant to section 9831(d)(1), a QSEHRA is not a group health plan, and as a result, is not subject to the group health plan requirements that apply under the Code and ERISA. Generally, payments from a QSEHRA to reimburse an eligible employee’s medical expenses are not includible in the employee’s gross income if the employee has coverage that provides minimum essential coverage (MEC) as defined in Code section 5000A(f). For this purpose, “medical expenses” means expenses for medical care, as defined in section 213(d) (which includes premiums for other health coverage, such as individual health insurance policies).

The Cures Act provides that a QSEHRA is an arrangement that meets the following criteria:

(a) The arrangement is funded solely by an eligible employer, and no salary reduction contributions may be made under the arrangement;

(b) The arrangement provides, after the eligible employee provides proof of coverage, for the payment or reimbursement of the medical expenses incurred by the employee or the employee’s family members (in accordance with the terms of the arrangement);

(c) The amount of payments and reimbursements for any year does not exceed $4,950 ($10,000 for an arrangement that also provides for payments or reimbursements of medical expenses of the eligible employee’s family members (family coverage)); and

(d) The arrangement is generally provided on the same terms (the “same terms requirement”) to all eligible employees of the eligible employer.

To be an eligible employer that may provide a QSEHRA, the employer must not be an applicable large employer (ALE), as defined in Code section 4980H(c)(2) and the regulations thereunder (and, thus, may not be an employer that, generally, employed at least 50 full-time employees, including full-time equivalent employees, in the prior calendar year), and must not offer a group health plan (as defined in section 5000(b)) to any of its employees. Pursuant to Code section 4980H(c)(2), an employer whose workforce increases to 50 or more full-time employees during a calendar year will not become an ALE before the first day of the following calendar year.

Qualified Employer Health Reimbursement Arrangements Permitted for Small Employers

The House and the Senate recently passed, and President Obama has signed, the “21st Century Cures Act”, which includes a provision exempting small employer health reimbursement arrangements (HRAs) from the Affordable Care Act’s (ACA’s) group plan rules, and from the excise tax imposed under Code Section 4980D for failure to comply with those rules. See our prior posts on the Section 4980D excise tax herehere and here. 


HRAs typically provide reimbursement for medical expenses (which can include premiums for insurance coverage). HRA reimbursements are exclude-able from the employee’s income, and unused amounts roll over from one year to the next. HRAs generally are considered to be group health plans for purposes of the tax Code and ERISA.

The ACA market reforms, which generally apply to group health plans, include provisions that a group health plan (including HRAs) (1) may not establish an annual limit on the dollar amount of benefits for any individual; and (2) must provide certain preventive services without imposing any cost-sharing requirements for these services. Code Section 4980D imposes an excise tax on any failure of a group health plan to meet these requirements.

The IRS has previously distinguished between employer-funded HRAs that are “integrated” with other coverage as part of a group health plan (and which therefore can meet the annual limit rules) and so called “stand-alone” HRAs. A “stand alone” HRA  almost certainly does not meet the ACA group coverage mandates. 

The New Law

The 21st Century Cures Act provides relief from the Section 4980D excise tax effective for tax years after December 31, 2016 for small employers that sponsor a qualified small employer HRAIn addition, previous transition relief for small employers, i.e. those that are not an Applicable Large Employer (ALE) under the ACA, is extended through December 31, 2016.

Therefore, for plan years beginning on or before December 31, 2016, HRAs maintained by small employers with fewer than 50 employees will not incur the Section. 4980D excise tax even if the plans are not qualified small employer HRAs. For tax years after December 31, 2016, small employer HRAs will need to satisfy the requirements of a qualified small employer HRA.

Qualified Small Employer HRA

A qualified small employer HRA must meet all of the following requirements:

(1)  Be maintained by an employer that is not an ALE (i.e., it employs fewer than 50 employees), and does not offer a group health plan to any of its employees

(2)  Be provided on the same terms to all eligible employees. For this purpose, small employers may exclude employees who are under age 25, employees have not completed 90 days of service, part-time or seasonal employees, collective bargaining unit employees, and certain nonresident aliens.

(3)  Be funded solely by an eligible employer. No employee salary reduction contributions may be made under the HRA. 

(4)  Provide for the payment of, or reimbursement of, an eligible employee for expenses for medical care (which can include premiums) incurred by the eligible employee or the eligible employee’s family members.

(5)  The amount of payments and reimbursements do not exceed $4,950 ($10,000 if the HRA also provides for payments or reimbursements for family members of the employee). These amounts will be adjusted for cost of living increases in the future. An HRA can vary the reimbursement to a particular individual based on variations in the price of an insurance policy in the relevant individual health insurance market with respect to: (i) age or (ii) the number of family members covered by the HRA, without violating this requirement that the HRA be provided on the same terms to each eligible employee.

Coordination With Other Rules

If an employee covered by a qualified HRA does not maintain “minimum essential coverage” within the meaning of Code Section 5000A(f), they will be subject to the individual mandate tax penalty under existing law. Under the new law, their HRA reimbursements will also be taxable income to them. 

In addition, for any month that an employee is provided affordable individual health insurance coverage under a qualified HRA, he is not eligible for a premium assistance tax credit under Code Section 36B. 

Employer Reporting Requirements

For years beginning after December 31, 2016, an employer funding a qualified HRA must, not later than 90 days before the beginning of the year, provide a written notice to each eligible employee that includes:

(1) The amount of the employee’s permitted benefit under the HRA for the year; 

(2) A statement that the eligible employee should provide the amount of the employee’s permitted benefit under the HRA to any health insurance exchange to which the employee applies for advance payment of the premium assistance tax credit; and

(3) A statement that if the employee is not covered under minimum essential coverage for any month, the employee may be subject to the individual mandate tax penalty for such month, and reimbursements under the HRA may be include-able in gross income. 

For calendar years that begin after December 31, 2016, employers also have to report contributions to a qualified HRA on their employees’ W-2s. 

More… text of the 21st Century Cures Act.

Final Rules Regarding Religious Accommodation of Contraceptive Coverage Mandate

On July 14, 2015 the IRS, DOL and HHS will jointly issue final rules regarding no additional cost preventive services, including contraceptive services, under the Affordable Care Act.

The final rules maintain the existing accommodation for eligible religious nonprofits, but also finalizes an alternative pathway for eligible organizations that have a religious objection to covering contraceptive services to seek an accommodation from contracting, providing, paying, or referring for such services.  The rules allow these eligible organizations to notify HHS in writing of their religious objection to providing contraception coverage, as an alternative to filling out the form provided by the Department of Labor (EBSA Form 700) to provide to their issuer or third-party administrator. HHS and the DOL will then notify insurers and third party administrators of the organization’s objection so that enrollees in plans of such organizations receive separate payments for contraceptive services, with no additional cost to the enrollee or organization, and no involvement by the organization.

The alternative notice must include:

  • the name of the eligible organization and the basis on which it qualifies for an accommodation;
  • its objection based on sincerely held religious beliefs to covering some or all contraceptive services, as applicable (including an identification of the subset of contraceptive services to which coverage the eligible organization objects, if applicable);
  • the plan name and type; and
  • the name and contact information for any of the plan’s third party administrators and health insurance issuers.

The departments issued a model notice to HHS that eligible organizations may, but are not required to, use.

Nothing in this alternative notice process (or in the EBSA Form 700 notice process) provides for a government assessment of the sincerity of the religious belief underlying the eligible organization’s objection.

In addition, the final rules provide certain closely held for-profit entities the same accommodations. Relying on a definition used in federal tax law, the final rules define a “closely held for-profit entity” as an entity that is not publicly traded and that has an ownership structure under which more than 50 percent of the organization’s ownership interest is owned by five or fewer individuals, or an entity with a substantially similar ownership structure.  For purposes of this definition, all of the ownership interests held by members of a family are treated as being owned by a single individual.  The rules finalize standards concerning documentation and disclosure of a closely held for-profit entity’s decision not to provide coverage for contraceptive services.

The final rules also finalize interim final rules on the coverage of preventive services generally, with limited changes.

iconFinal Rules

icon Model Notice