The Tax Cut and Job Acts Creates Revisions in Employee Benefits: What You Need to Know

by Megan Hiles
Photo of a businessman holding a stretched out linked cut-out of paper dolls, representing employee retention.

Employee benefits have become increasingly important with the shortage of talent and increased competition for top employees. The addition of benefits increases loyalty, productivity, and attendance among current employees and provides incentives for recruiting. According to a recent survey 79% of employees would rather have new or additional benefits rather than an increase in pay.

With the Tax Cuts and Jobs Act (TCJA), there are several requirement changes you should be aware of when it comes to employee benefits. Below are the some of the changes:

Executive Compensation

  • Strict $1 million deduction limit for public companies: TCJA repeals the performance-based compensation and commission exceptions, such as cash bonuses, stock options and restricted stock units. Now any compensation over $1 million paid by a publicly traded company to a covered employee for a given year is nondeductible.
  • Excise tax on “excessive” compensation paid by tax-exempt employers: TCJA plans to harmonize the executive compensation limitations of public companies to tax-exempt and governmental employers by imposing a 21% employer-paid excise tax on compensation in excess of $1 million per year. This also includes “excessive parachute payments.”
  • Tax deferral for stock options and restricted stock units of private companies: TCJA loosened the taxation rules for employees of private companies who exercise certain types of stock options or who are issued restricted stock units. Revisions allow the employee to defer the taxes otherwise owed for up to five years, however, TCJA imposes strict limitations for employees who qualify for this tax deferral.

Qualified Retirement Plans

  • Extended qualified plan loans offset rollover period: TCJA extends the due date for loan repayment until the participant’s personal tax filing deadline (including extensions) for the tax year in which the offset occurred.

Fringe Benefits

  • Employee moving expenses: New laws repeal the exclusion of moving expense reimbursements from an employee’s income.
  • Transportation fringe benefits: Employers could previously provide transportation benefits (parking, public transit passes, bicycling expenses) tax free to employees and deductible to the employer. The new law eliminates employer deductions for these benefits.
  • Employee achievement awards: TCJA  prohibits the distribution of achievement awards as the form of cash, cash equivalents, gift certificates, vacations, meals, lodging or entertainment tickets.
  • Meals and entertainment: New laws will no longer deduct client or customer entertainment or recreation expenses. This includes client outings, events and tickets.

Miscellaneous Revisions

  • Repeal of individuals mandate for health insurance: Beginning January 2019, the new law repeals the individual mandate by reducing the penalties for failing to maintain coverage to $0.
  • Repeal of Roth IRA recharacterzations:TCJA repeals the rules allowing for the conversion from Roth IRA to a tradition IRA.

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