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.

Filing Requirements for IRS Forms 1094 and 1095

The IRS has released final Forms 1094 and 1095, which will be used to enforce the ACA employer mandate penalties and the individual mandate and tax credit eligibility rules. These forms must first be filed by employers and insurers in early 2016, for the 2015 calendar year. Filing is optional in 2015 for the 2014 calendar year. While we do not recommend voluntary filing, we do recommend employers review the forms and the instructions so they are aware of what filing in 2016 will involve because they need to be gathering the information to report now.