Tax Reform: The Five Big Changes Affecting Employee Benefits

by Dickinson Wright

Dickinson Wright

On December 22, 2017, President Trump signed H.R. 1 (formerly, the “Tax Cuts and Jobs Act” (the “Act”)) into law. While the Act was primarily focused on business tax cuts and individual tax reform, the Act includes several provisions that have implications for employee benefits and executive compensation.

1. Compensation Deduction Limits for Publicly Traded Employers

Prior Law

Under Code Section 162(m), publicly held corporations are limited to a $1 million cap on the deductibility of compensation paid to a single “covered employee.” Prior to the Act, “covered employees” included the CEO and the three highest paid officers. Additionally, there was an exception that generally allowed compensation to be deductible (without regard to the $1 million cap) if it was “performance-based compensation,” based on performance goals set by a compensation committee with shareholder approval.

Changes in the Act

The Act repeals the performance-based compensation exception, and expands the definition of covered employees to include the CEO, CFO, and three highest paid employees. Additionally, once an employee qualifies as a covered employee, the deduction limitation applies so long as that employee or any beneficiary is being paid by the corporation. The Act also expands the definition of “publicly traded corporation” to include all companies that file SEC reports.

Implications and Action Steps

The Act’s changes for the compensation deduction limits go into effect for taxable years beginning after December 31, 2017. However, the revisions do not apply to payments made pursuant to a written, binding contract between a company and a covered employee that was in effect on November 2, 2017, provided the contract is not modified in a material way on or after that date.

Employers should consider whether any existing documents might fit into the transition rule, and should determine whether any bonuses payable in 2018 might be accelerated into 2017 pursuant to IRS guidance regarding accruals.

2. Excise Tax on Tax-Exempt Organization Compensation

The Act imposes a new 21% excise tax on compensation that exceeds $1 million paid to a tax-exempt employer’s five highest paid employees

(including any former employees who would have been covered by this definition for any year after December 31, 2016). It applies to both direct and indirect compensation. It also applies to any “parachute payment,” where the aggregate payment is three times (or more) the average compensation in the preceding five years.

Implications and Action Steps

The new excise tax is effective for tax years after December 31, 2017. There is no transition rule for applying the excise tax on compensation paid to the employees. Exempt organizations will need to identify their highest five-paid employees based on the 2017 tax year, who will be considered covered employees for 2018.

3. Tax Deferral for Certain Equity Grants from Private Companies

The Act allows privately held employers to provide a new tax-deferred benefit to certain employees. “Qualified employees” may elect to defer tax on certain equity grants for up to five years. The election to defer must be made within 30 days after the employee’s right to the stock has become vested, and applies to “qualified stock” issued pursuant to stock option exercises or settlement of restricted stock units after December 31, 2017.

The awards must be offered with the same terms to no less than 80% of the company’s employees providing services in the United States. The employer must provide notice to the employees about the right to defer.

“Qualified employees” are employees excluding the company’s CEO, CFO, any person who has ever served in that capacity, family members of the aforementioned, 1% owners (and those that have been 1% owners in the past 10 tax years), and anyone who has been one of the four highest paid officers in the past 10 tax years.

Implications and Action Steps

Until regulations are issued specifying additional details with respect to the 80% rule and notice requirements, a company will be treated as in compliance with the Act so long as it demonstrates a reasonable, good faith interpretation of the Act.

It is unclear how valuable this benefit will be to employers, given the 80% requirement as well as the requirement that employees recognize income within five years of vesting, even if no liquidity event has occurred prior to that date.

4. Qualified Retirement Plan Loans

Truly, the biggest news about the Act with respect to qualified retirement plans was what the Act did not include. Early reports suggested that the Act would impose limitations on the amount of pre-tax contributions to qualified retirement plans. The Act does not make such changes.
However, the Act does include a provision that would allow those who leave their current employer with an outstanding loan from their qualified retirement plan to not be taxed on that loan amount if they contribute that loan balance to an IRA by the date their individual tax return is due.

Implications and Action Steps

This will be seen as a valued benefit for many employees, as it is difficult for employees to arrange for repayment of a plan loan after termination.

5. New Limitations on Fringe Benefits

A number of different fringe benefits are affected by changes in the Act. These include:

  • Excluding from the definition of excludable employee achievement awards anything that is not tangible personal property (e.g., cash, cash equivalents, gift cards, meals, lodging or tickets);
  • A denial of the employer deduction for the expense of providing qualified transportation fringe or reimbursements to an employee in connection with commuting; and
  • A suspension of the exclusion from gross income for employer-provided qualified moving expense reimbursements and the deduction by an individual of moving expenses incurred when starting a new job from 2018 through 2025.

Implications and Action Steps

All of the fringe benefit changes go into effect for tax years after December 31, 2017.

With respect to employee achievement awards, the Conference Report for the Act suggests that this is not intended to be understood as a change from existing law, and merely represents a codification of the IRS’ existing enforcement position.

The changes to qualified transportation fringe eliminate the employer deduction but retain the exclusion. For many employers it would now be more efficient to pay deductible wages subject to payroll taxes than to provide an excludable benefit that is taxable to the employer.

With respect to qualified moving expenses, employers may need to consider grossing-up the expenses of employees who are being asked to move for a new position, as they may be expecting a tax-free incentive to relocate.


There are many year-end planning and compliance steps to be considered by employers in the very short time window prior to the New Year.

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.

© Dickinson Wright | Attorney Advertising

Written by:

Dickinson Wright

Dickinson Wright 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.