The Tax Cuts and Jobs Act, signed into law by President Trump on December 22, 2017, and its effect on individual and corporate taxes has received tremendous attention. However, several lesser-known provisions will impact employee benefits:
Moving expense reimbursements are now taxable. Previously, when an employer paid for a worker’s moving expenses due to a new job or relocation, the amount was not taxable to the employee. The new law suspends that tax-free treatment through 2025, which means it will be considered income to the employee and taxed as such. The exception to this rule is for active-duty military members. Employers with this common practice should review their arrangements (sometimes contained in policies and often contained in employment contracts) to consider the impact the new tax may have on recipients.
There are some changes to qualified transportation fringe benefits. The language in the new law impacting these plans is unclear and up for interpretation, so technical corrections may be forthcoming. At this time, the provision yields the following results:
- Participants in these plans will continue to receive their benefits tax-free and can continue to make pre-tax salary reduction contributions to fund the benefits;
- However, sponsors of these plans generally may not deduct the expenses they incur in connection with these plans;
- Tax-exempt employers generally are subject to unrelated business income tax on the value of the expenses incurred in connection with these plans.
As the provision stands now, government employers will be able to continue these plans without change, while for-profit employers and tax-exempt entities will need to decide whether to terminate the plans or pay the additional taxes due. For-profit companies will also need to decide if they will pass on to shareholders the tax-cost of maintaining these plans. These changes in the law are likely to be particularly troublesome for employers with offices in jurisdictions that have commuter assistance plan mandates in place, such as Washington, D.C.
The Bicycle Commuter Benefit will also change. The new law for bicycle commuters takes an opposing stance to the one taken with respect to qualified transportation fringe benefit plans, above. While forthcoming technical corrections may change or clarify this language, the provision currently yields the following results:
- Participants in these plans will be taxed on this benefit, at least for years 2018 through 2025;
- However, plan sponsors may continue to deduct the costs of this program.
The rationale behind this change is unclear and it’s in direct contrast to the new qualified transportation rule, so it’s likely that there will be some changes in the provisions to reconcile the two rules. For now, employers providing this benefit should take into consideration the impact of the new tax on recipients.
All of the above suggests that there will be some flux in regulatory and judicial interpretations, and perhaps in the language of the law itself, as we move forward. We’ll certainly be watching developments from an HR perspective, but we encourage employers to consult with their accountants and continue to monitor developments to the new tax law and keep abreast of any changes.