Practical Insights on Tax Reform: Impact on Employee and Fringe Benefits

by Nutter McClennen & Fish LLP

On December 22, 2017, President Trump signed into law legislation, known as the Tax Cuts and Jobs Act (“TCJA”), which is the most extensive overhaul of the United States Internal Revenue Code (the “Code”) in 30 years. In December, we issued a general advisory outlining the major changes to the Code made by TCJA. This advisory focuses on the provisions of TCJA that affect employee and fringe benefits. Unless otherwise noted, the changes described below are effective for taxable years beginning on or after December 31, 2017.

Extended Period for Rollover of Retirement Plan Loan Repayments
Beginning in 2018, TCJA provides relief for participants of tax-qualified retirement plans with outstanding loans. Prior to TJCA, most 401(k) plans provided that outstanding plan loans must be repaid upon a separation from service (or plan termination). If the loan was not repaid, the outstanding balance was treated as an “offset” against the participant’s outstanding account place – meaning the loan would be treated as a distribution resulting in immediate taxation and, in most cases, a 10% early withdrawal penalty. Participants could previously avoid this deemed distribution and penalty by making a rollover contribution to an IRA within 60 days, essentially requiring a participant to repay the loan. That approach, however, provided little relief because participants seldom had the liquid assets necessary to repay the loan offset within the 60-day window.  

TCJA extends the time period to complete the direct rollover of a loan offset in the event of separation from service or plan termination from 60 days to the due date (including extensions) for filing the participant’s federal income tax return for the year of the offset. This extension of time provides participants with an opportunity to avoid early distribution penalties and a permanent reduction to their tax-sheltered retirement savings by giving them a longer period of time to repay the loan offset.

Employers should review the loan procedures of their tax qualified plans and any related participant communications to determine what changes should be made to provide participants with this additional relief. 

IRA Recharacterizations
Effective for any Roth IRA conversions made in 2018 or later, TCJA precludes individuals from unwinding those Roth IRA conversions to revert to a traditional IRA. Prior to TCJA, individuals who contributed to a traditional IRA could convert that IRA to a Roth IRA and then undo that original conversion by recharacterizing the Roth IRA back to a traditional IRA if the first conversion resulted in unfavorable tax consequences (often the tax consequences of the initial conversion would not be known for months). Under prior law, the recharacterization had to occur before the due date for the individual’s income tax return for the year of conversion. 

TJCA now precludes the recharacterization back to a traditional IRA for conversions occurring in and after 2018 (i.e., taxpayers will no longer be able to unwind a conversion to a Roth IRA). Thus, even though taxpayers are still permitted to convert a traditional IRA to a Roth IRA, they will not be able to undo that conversion if it results in unfavorable tax consequences. Conversions made during 2017, however, may still be recharacterized through October 15, 2018.

Administrators of IRA accounts should take notice of this change.

Affordable Care Act – Individual Mandate
Effective in 2019, TCJA amends the Code by reducing to zero the penalty for failing to comply with the individual mandate under the Affordable Care Act (“ACA”). Prior to TCJA (and in 2018), the ACA required individuals to purchase a minimum level of health care coverage or be subject to a tax. While TCJA did not repeal the individual mandate altogether, it reduced to zero the penalty for failing to comply with the mandate. Also, it is important to note that the employer shared responsibility rules are still in place. Therefore, employers could still be subject to the employer shared responsibility payment if they do not continue to offer health coverage to employees meeting the requirements of the ACA. 

Although TCJA effectively eliminated the federal penalty for individuals who fail to purchase and maintain health insurance coverage, Massachusetts residents will continue to remain subject to similar penalties under state laws for failing to obtain insurance coverage.   

Qualified Transportation and Certain Other Commuting Expenses
Beginning in 2018, employers may no longer deduct qualified transportation fringe benefits expenses (excluding qualified bicycle expense reimbursements), or any expenses for providing transportation for an employee to commute between his or her residence and place of employment, except as necessary for ensuring the employee’s safety. Previously, employers were able to deduct these expenses and the expenses were excludible from the employee’s income. While TCJA changed the employer’s ability to deduct the expenses, there was no change in an employee’s ability to exclude the expenses from his or her income.

Reimbursements for qualified bicycle expenses paid on or after January 1, 2018 are deductible by the employer, but employees must include the reimbursement in the recipient’s income. Beginning with the 2026 tax year, qualified bicycle commuting reimbursements will again be excludible from employees’ income, but will no longer be deductible by employers.

Employers should review their fringe benefit programs and analyze the impact that the loss of these deductions will have on the bottom line. If an employer wants to maintain these deductions, it could provide the benefits to its employees on a taxable basis (assuming the resulting compensation is reasonable). 

Change in the Deductibility of Entertainment, Amusement, and Recreation Expenses
Beginning in 2018, TCJA eliminates the employer deduction for (i) expenses associated with entertainment, amusement, or recreation; (ii) membership dues for clubs organized for business, pleasure, recreation, or any other social purpose; and (iii) a facility or portion of a facility used for a purpose described in (1) or (2). Also beginning in 2018, TCJA limits to 50% the amount an employer may deduct for food or beverages provided to employees for the employer’s convenience (and that deduction is eliminated completely  beginning in 2026). Prior to TCJA, employers could generally deduct up to 50% of certain entertainment, amusement, and recreation expenses, and 100% of employee meals provided for the employer’s convenience, and such amounts were excludible from the employee’s income. While TCJA drastically changed the deductibility of these expenses for the employer, the amount attributable to employee meals is still excludible from an employee’s income. 

Employers should review existing arrangements to ensure the desired tax treatment is achieved. For example, employers could revise existing arrangements to achieve full deductibility of these expenses by providing such reimbursements to employees on a taxable basis.

Moving Expenses
Effective for 2018 through 2025, TCJA precludes employees from excluding from income the value of any qualified moving expense reimbursement or deducting any such unreimbursed expenses (with an exception for certain members of the U.S. Armed Forces). Under previous law, employees could either exclude the value of any such reimbursement from income or deduct the value of any such unreimbursed expenses. Absent any future changes, beginning with the 2026 tax year, employees may revert back to the pre-TCJA rules. 

As noted above, arrangements providing these types of benefits should be reviewed to ensure the desired tax treatment is achieved and if necessary consider alternative arrangements. 

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Nutter McClennen & Fish LLP | Attorney Advertising

Written by:

Nutter McClennen & Fish LLP

Nutter McClennen & Fish LLP on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
Privacy Policy (Updated: October 8, 2015):

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.


JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at:

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.