Much attention has been paid to the impact of the Tax Cuts & Jobs Act (TCJA) on businesses, particularly since the law makes significant distinctions between the treatment of “C” corporations and the treatment of “S” corporations and partnerships. Another highly visible (and contested) change has been the flat cap on the deductibility of state taxes by individual taxpayers – a change which has a disproportionately negative impact on high-tax states.
However, the law is driving changes across many areas of the enterprise, including some areas that have received less attention even though they are just as critical to business owners. One of these is the area of employee benefits.
First off, the new law effectively repealed the Affordable Care Act’s individual mandate as of 2019. The provision specifically stated that a U.S. citizen or legal resident had to have demonstrable “minimum credible coverage” or risk facing a penalty fine.
However, the employer responsibilities contained within the Affordable Care Act were not repealed and remain in effect. This includes the requirement that employers with 50 or more employees must still offer coverage or face a possible penalty, and these larger employers must still prepare, distribute and file Form 1094-C (Transmittal of Employer-Provided Health Insurance Offer and Coverage Information Returns) and Form 1095-C (Employer-Provided Health Insurance Offer and Coverage Insurance) with the IRS.
Some impacts of the tax reform are specific and clear — such as direct changes mandated by the new law. Others are indirect and envisioned, but not necessarily set in stone. One of the latter is a new risk that results from the repeal of the individual mandate and the simultaneous maintaining of the business mandate. Specifically, it is possible that younger and healthier employees may opt not to pay for employer-provided insurance, which could in turn result in their loss from the risk pool. If this happens, then the employer’s overall plan costs could go up.
Another area of impact on employee benefits has to do with an employer’s ability to deduct certain benefits, specifically those associated with transit, bicycling and other transportation benefits. Effective in 2018 (the present year), the longstanding deduction that employers could take for providing qualified transit and parking benefits was repealed (although the employees can use elective deferrals to pay for these benefits).
In addition, employees now must report qualified bicycle commuting benefits as taxable income (previously, such benefits were excluded from gross income and wages), since bicycling commuter reimbursements cannot be purchased via salary reduction contributions (as others noted can be).
The new law also changes the rules governing loans taken by employees from their qualified retirement plans, such as 401(k) plans. Prior to the new law, an employee who terminated employment with an outstanding loan against their retirement plan could avoid having the outstanding loan balance taxed if the loan amount was rolled over to an IRA or other eligible retirement plan within 60 days. In this case, the law actually expands the time period so that it now equals the due date for filing the employees tax return for that year. This can even include extensions, so the result is that employees who are in this circumstance gain a greater ability to effectively complete the process without penalty.
Another area that impacts employees of companies that regularly recruit, relocate or transfer personnel is the removal of the ability to deduct most moving expenses. The new law has suspended the personal deduction for relocation expenses and the exclusion from income of the employer-paid relocation expenses. This means that all moving or relocation expenses reimbursed by an employer after January 1, 2018, are taxable as income to the individual.
The new law mandates this change across the board, save for a limited carve-out specifically for members of the military on active duty who move directly as a result of a military order. This new restriction becomes effective in 2018 and continues through 2025.
One challenge overall with the new law is that changes are enacted with various start and end points. In the case of employer benefits, this means that some of the changes discussed here went into effect with virtually no time for employers to adjust or adapt, while others are in place only for a specific period of time.
As a result, employers should work very closely with their CPA and benefits administration advisors to ensure that they adjust, adapt, update and revise their strategies and benefit programs to match the realities brought forth by the new law. In addition, employers should work to educate their employees on the employee-side changes and impacts, so that their personnel can plan effectively on an individual basis as well.