On December 22, 2017, the Tax Cuts and Jobs Act (“the Act”) was signed into law, and it has various implications for employers who sponsor employee benefit plans. This newsletter focuses on the provisions in the Act that affect health and welfare plans and fringe benefits. At the end of this newsletter, we also identify certain proposals that were considered, but ultimately were not part of the Act.
Contrary to what some people are saying, the Act did not repeal the Affordable Care Act. As noted below, the Act repeals the individual mandate effective January 1, 2019. However, this may have very little, if any, impact on employer group health plans. Importantly, the other provisions of the Affordable Care Act that apply to employer group health plans, including the Internal Revenue Code (the “Code”) Section 4980H large employer shared responsibility penalties, the related reporting requirements under Code Sections 6055 and 6056 (i.e. the Forms 1094-B and -C, 1095-B and -C), and the various mandates (such as coverage for children to age 26) are still in effect.
I. Repeal of the Individual Mandate
The Act repealed the shared responsibility payment for individuals who fail to maintain minimum essential coverage, commonly known as the “individual mandate.” This repeal is effective with respect to health coverage in months beginning after December 31, 2018.
As a result of this change, some employees might drop employer group health plan coverage on or after January 1, 2019 for themselves or their dependents, when there will no longer be a penalty for not having health coverage. If such employees are predominately young and healthy, it could cause plan costs or premiums to increase. However, most people expect the impact on employer group health plans to be fairly minimal.
II. Transportation Benefits
Elimination of Deduction for Qualified Transportation Fringe Benefits: The Act generally eliminated the business deductions for transportation and commuting benefits effective January 1, 2018 (and effective January 1, 2026 for qualified bicycle commuting reimbursements). First, the Act amended Code Section 274(a) by eliminating the business deduction for Code Section 132(f) qualified transportation fringes which include: (1) parking; (2) transit passes; (3) vanpooling (i.e., transportation in a commuter highway vehicle if such transportation is in connection with travel between the employee’s residence and place of employment); and (4) qualified bicycle commuting reimbursement.
Second, the Act added Code Section 274(l) which eliminates the deduction for any expense an employer incurs to provide transportation, or any payment or reimbursement, to an employee in connection with travel between the employee’s residence and place of employment, except as necessary for ensuring the safety of the employee.
Despite eliminating these deductions, qualified transportation fringe benefits (except the qualified bicycle commuting reimbursement, as noted below) are still excludable from an employee’s gross income and wages for employment tax purposes. Accordingly, because these benefits are still of value to employees, most employers will likely continue offering them. Alternatively, some employers may eliminate their qualified transportation fringe benefits and replace them with increased wages or other benefits that the employer can deduct.
Elimination of Qualified Bicycle Commuting Reimbursement: Prior to the passage of the Act, under Code Section 132(f) up to $20 per month for a qualified bicycle commuting reimbursement was excludable from an employee’s gross income and wages for employment tax purposes. The Act suspended this exclusion for tax years beginning after December 31, 2017 and before January 1, 2026. Because this is a relatively small benefit, many employers may decide to keep offering it despite the fact it no longer receives preferential tax treatment under the Code.
III. Employer Credit for Paid Family and Medical Leave
The federal Family & Medical Leave Act (“FMLA”) does not require employers to provide paid leave. However, the Act provides a tax credit incentive beginning in 2018 for employers who provide FMLA paid leave, if they meet a number of requirements. The tax credit does not apply to paid FMLA for tax years beginning after December 31, 2019.
Eligible Employer: To qualify for the tax credit, an employer (determined on a controlled group basis) must have a written policy under which:
all full-time “qualifying employees” are paid at least two weeks of FMLA leave per year, at a rate of pay equal to at least 50% of normal wages; and
part-time “qualifying employees” are paid not less than a pro-rata amount of what is paid to full-time qualifying employees. For this purpose “part-time” means employees customarily employed for fewer than 30 hours per week, and the pro-rata amount is determined based on the number of hours the part-time employee is expected to work, as compared to the hours an equivalent full-time employee is expected to work.
Qualifying Employees: “Qualifying employees” are employees who:
have been employed by the employer for one year or more; and
for the preceding year had compensation not exceeding 60% of the compensation threshold for designation as a highly compensated employee under the Tax Code. For 2018 this amount is $72,000 (i.e., 60% of $120,000 under Code Section 414(q)(1)(B) for 2017).
It appears that an employer (on a controlled group basis) must offer all qualifying employees paid FMLA leave in order to qualify for the credit. For example, if an employer only offers paid FMLA leave to employees who make $50,000 or less, the employer would not qualify for the tax credit. Furthermore, if the employer offers paid FMLA leave to employees who make more than $72,000 in 2018, there is no tax credit for such employees. There are obvious morale issues if an employer offers paid FMLA leave to those employees making under $72,000, but does not offer paid FMLA leave to employees making over that arbitrary salary threshold.
Amount of Tax Credit: The tax credit is capped at 25% of employer-paid FMLA leave wages for qualifying employees paid 100% of their regular wages during their FMLA leave. To qualify for even the lowest tax credit of 12.5%, an employer must pay at least 50% of regular wages during the leave. The available tax credit then gradually increases up to the 25% maximum as the employer pays a larger percentage of qualifying employees’ regular wages.
An employer can take a tax credit for up to 12 weeks of paid FMLA leave per qualifying employee during a tax year.
Qualifying Paid Leave: Paid leave for the following purposes qualifies for the tax credit:
the birth of a child and to care for the child;
placement of a child with an employee for adoption or foster care;
to care for a spouse, a child, or a parent who has a serious health condition;
an employee’s serious health problem that makes the employee unable to perform the functions of his or her position; and
any qualifying exigency, as defined by the Secretary of Labor, due to a spouse, child, or a parent of the employee being covered on active duty in the Armed Forces.
Most importantly, if the FMLA leave is paid using vacation leave, personal leave, or medical or sick leave, such paid leave is not eligible for the tax credit. This could be problematic because many employers require employees to exhaust these types of paid leave while on FMLA. In addition, any leave that is paid by a state or local government, or is required by state or local law, is not eligible for the tax credit.
As with any new law, there are unanswered questions such as whether part-time employees will be exempt from the current 1,250 hours work requirement under the FMLA. Additionally, employers may want to consider whether it makes economic sense to pay 100% of an employee’s wages to receive a 25% tax credit for those payments. For employers who currently provide paid FMLA leave to all employees who make $72,000 or less per year, it may make sense to carefully review, and if necessary modify, their FMLA policies to ensure that they qualify for the tax credit. However, many employers may decide that the changes they must make to their current FMLA leave policies do not warrant trying to qualify for the tax credit.
IV. Unchanged Health & Welfare Provisions
In reconciling the House and Senate tax reform bills, the Joint Conference Committee considered changes to a variety of the health and welfare provisions of the Code. Ultimately, the following proposed revisions were not included in the Act:
Dependent Care Assistance Program: Code Section 129 provides an exclusion from gross income of employer-provided dependent care assistance subject to certain limits and restrictions. The House proposed the repeal of this exclusion for taxable years beginning after December 21, 2022.
Educational Assistance Program: Code Section 127 permits an individual to exclude from gross income up to $5,250 per year of educational assistance provided by an employer under a Section 127 Plan. The House proposed the repeal of this exclusion.
Adoption Assistance Program: Code Section 137 provides an exclusion from gross income of amounts paid or reimbursed by an employer pursuant to an adoption assistance program. The House proposed the repeal of this exclusion.
Employer-Provided Child Care Credit: Code Section 42F provides a tax credit equal to 25% of qualifying child care expenses and 10% of expenditures on child care resources and referral services. The House proposed the repeal of this tax credit.
Contribution to Archer MSAs: Code Section 220 provides a deduction for certain amounts contributed to an Archer MSA. The House proposed the repeal of this deduction.
Employer-Provided Housing: Code Section 119 provides an exclusion from gross income of the value of lodging provided by an employer to an employee under certain circumstances. The House proposed the repeal of this exclusion.