New Tax Law – Additional Details
We have been very busy brainstorming with our clients about the impact of the new tax bill on their employee benefit and executive compensation plans and the participants in those plans.
Most of our conversations have been with our tax-exempt and governmental clients that are contemplating before-year-end actions to address the new 21% penalty tax on compensation over $1M paid to covered employees (and especially the impact of SERP vesting events under that new rule) and appropriate actions relating to the new 21% penalty tax on “excess” severance benefits paid to covered employees.
In addition, we have had conversations with clients impacted by the less talked about provisions in the law and we wanted to share some additional detail about these provisions.
Taxability of Moving Expense Reimbursements. First, because the new law makes currently tax-free employee moving expense reimbursements taxable beginning on January 1, 2018 and through at least the end of 2025 (except for certain active military members), employers with this common practice are reviewing their arrangements (sometimes contained in policies and often contained in employment contracts) to consider the impact of this new “phantom income” tax on recipients. Note that the above-the-line Form 1040 deduction for individuals related to qualified moving expenses is similarly suspended for 2018-2025. (To show how ambiguous many of the concepts are in the new law, at least one commentator believes that an implication of the law is the elimination of an employer’s ability to deduct moving expense reimbursements, but this currently is a minority opinion.)
Qualified Transportation Fringe Benefit Changes. Second, although not a common benefit, a number of our clients maintain qualified transportation fringe benefit plans. The language in the new law impacting these plans is quite strange, especially when compared to the odd language affecting bicycle commuter plans (discussed below). Although it’s certainly possible that a forthcoming technical corrections bill will change/clarify this language, the best literal reading of this provision yields the following results: 1. 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; but 2. Sponsors of these plans generally “may not deduct” the expenses they incur in connection with these plans; and 3. Tax-exempt employers generally are subject to unrelated business income tax on the value of the expenses incurred in connection with these plans.
If this ends up being the final settling place for this change, it appears that 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 and, for for-profit employers, to pass on to shareholders (including pass-through owners) the tax-cost of maintaining these plans.
We have been unable to reverse-engineer a policy rationale for this unusual result. That is, either the Congress thinks these plans are good policy (because, for example, they encourage the use of mass transit and primarily benefit working class employees) or it does not. But it is hard to see why the Congress would have intentionally left unchanged these plans of governmental employers (and, potentially, for-profit employers with large NOLs), while adding a “poison pill” to these plans of for-profit employers and tax-exempt entities. There certainly can be only a miniscule revenue impact from this statutory language as currently written. Only time will tell if this curiosity is addressed by the Congress.
(These changes in the law will be particularly troublesome for employers with offices in jurisdictions -- like D.C. and New York City -- that have commuter assistance plan mandates.)
Bicycle Commuter Benefits Changes. Third, although an extremely rare benefit (at least among our clientele), the Congress – inadvertently, we imagine – took an approach to this benefit that is the polar opposite of the one taken with respect to qualified transportation fringe benefit plans. Although, again, it’s certainly possible that a forthcoming technical corrections bill will change/clarify this language, the best literal reading of this provision yields the following results: 1. Participants in these plans will be taxed on this benefit (at least for years 2018 through 2025); but 2. Sponsors may continue to deduct the costs of this benefit (again, at least from 2018 through 2025). Therefore, employers providing this benefit will need to consider the impact of this new “phantom income” tax on recipients.
Once again, there does not appear to be any policy rationale behind this change – punishing Americans who commute by bicycle? – so perhaps there will be some change (even if only to reconcile the new bicycle rule with the new qualified transportation rule).
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, so employers should continue to monitor developments. Please contact us at 410-321-9000 (or email Alison at achristian@smithdowney.com) if we can assist in your efforts to understand and respond to any provisions of the new law.