Tag Archives: employee benefits

December 26, 2017

The New Tax Bill & Employee Benefits: What is Changing? What is Not?

On December 22, 2017, the President signed into law the Republican tax bill that was passed by Congress just days earlier. Beyond cutting individual tax rates temporarily and slashing corporate taxes to 21 percent permanently, the tax bill includes some important changes to the taxation of certain employee benefits.

Listed below are the major changes to employer-provided benefits under the final tax bill:

Revised: Time to repay “offset” employer-sponsored retirement plan loans.
- Currently, retirement plan loans are generally accelerated (i.e., immediately due and payable) when the plan terminates or the participant terminates employment. If the loan is not repaid, the plan will “offset” the loan against the participant’s account. This loan offset may be rolled over by making an equivalent contribution to an IRA or another qualified plan, but this must be done within 60 days of the date of the offset.
- Beginning in 2018, the period to roll over a loan offset is extended to the individual’s due date for the tax return for the year in which the offset occurred (including extensions).
Repealed: Employer deduction for qualified transportation fringe benefits, including commuting expenses.
- Currently, an employer can deduct the cost of certain transportation fringe benefit provided to employees (i.e., parking, transit passes, and vanpool benefits), even though such benefits are excluded from the employee’s income.
- Beginning in 2018, the employer deduction for qualified transportation fringe benefits is fully disallowed. In addition, except as necessary for ensuring the safety of an employee, the employer deduction for providing transportation or any payment or reimbursement for commuting to work is disallowed.
- These changes do not appear to prevent employers from sponsoring a qualified transportation plan to allow employees to elect to have certain transportation costs paid on a pre-tax basis.
Repealed: Employee exclusion of bicycle commuting reimbursements.
- Currently, an employee can exclude from income qualified bicycle commuting reimbursements of up to $20 per qualifying bicycle commuting month. These amounts are also excluded from wages for employment tax purposes.
- Beginning in 2018, the qualified bicycle commuting reimbursement exclusion is fully disallowed.
- Going forward, employers can still maintain a program for bicycle commuting, however, reimbursements under such program will be taxable to the employee.
Repealed: Employer deduction for entertainment, amusement and recreation provided to employees.
- Currently, an employer can fully deduct expenses for recreational, social, or similar activities primarily for the benefit of non-highly compensated employees, provided such activities directly relate to the active conduct of the employer’s business.
- Beginning in 2018, this deduction is fully disallowed. The employee exclusion remains unchanged.
Partially Repealed: Employer deduction for meals, food and beverages provided to employees.
- Currently, an employer can fully deduct any food and beverage expense that can be excluded from an employee’s income as a de minimis fringe benefit.
- Beginning in 2018, there will be a 50% limitation on the deduction for food and beverages that can be excluded from an employee’s income as a de minimis fringe benefit, including expenses for the operation of an employee cafeteria located on or near the employer’s premises. The employee exclusion remains unchanged.
Partially Repealed: Employee exclusion of value of certain types of employee achievement awards and the employer’s related deduction.
- Currently, an employer can deduct up to $400 (or up to $1,600 in the case of certain written nondiscriminatory achievement plans) of the value of certain employee achievement awards for length of service or safety. The employee receiving such award can exclude the award from income to the extent that the value of the award does not exceed the employer’s deduction.
- Beginning in 2018, the employee’s exclusion and employer’s deduction for employee achievement awards will not apply to cash, gift coupons/certificates, vacations, meals, lodging, tickets to sporting or theater events, securities, and “other similar items.” However, an employee can still exclude (and an employer can still deduct) the value of other tangible property and gift certificates that allow the recipient to select tangible property from a limited range of items pre-selected by the employer.
Repealed: Employee exclusion from income of employer-provided qualified moving expense reimbursements.
- Currently, an employee can exclude qualified moving expense reimbursements paid by his or her employer for the reasonable expenses of moving. These amounts are also excluded from wages for employment tax purposes.
- Beginning in 2018, the qualifying moving expense reimbursement is fully taxable to the employee, except for members of the Armed Forces on active duty who move pursuant to a military order.
Enacted: Employer tax credit for employers providing paid family and medical leave.
- Beginning in 2018, an employer that offers at least two weeks of annual paid family and medical leave, as described by the Family and Medical Leave Act (FMLA), to all “qualifying” full-time employees (and a proportionate amount of leave for non-full-time employees) will be entitled to a tax credit. The paid leave must provide for at least 50% of the wages normally paid to the employee. “Family and medical leave” does not include leave provided as vacation, personal leave, or other medical or sick leave.
- A “qualifying employee” is an employee who has been employed by the employer for at least one year, and whose compensation for the preceding year did not exceed 60% of the compensation threshold for highly compensated employees (i.e., compensation did not exceed $72,000).
- The credit will be equal to 12.5% of the amount of wages paid to a qualifying employee during such employee’s leave, increased by .25% for each percentage point the employee’s rate of pay on leave exceeds 50% of the wages normally paid to the employee (but not to exceed 25% of the wages paid).

In addition, employers should be aware that the tax bill eliminates the Affordable Care Act’s (“ACA”) individual mandate penalty starting in 2019. The individual mandate requires most individuals (other than those who qualify for a hardship exemption) to carry a minimum level of health coverage. Currently, individuals who do not enroll in health coverage can incur a tax penalty. Beginning in 2019, individuals will still technically be required to carry health coverage, but will no longer be penalized for failing to do so. This change to the ACA’s individual mandate could indirectly impact employers. For example, if fewer employees avail themselves of Exchange coverage and the related subsidies, an employer’s penalty risk under the ACA’s employer mandate will decrease. The lack of individual penalty could also destabilize the Exchange, resulting in more individuals looking to their employers for coverage.

Although earlier drafts of the tax bill called for repeal or modification, the following benefit provisions remain unchanged by the final tax bill:

The hardship distribution safe harbor rules incorporated into many retirement plans (proposals would have eased hardship rules);
The employer-provided child care credit;
Dependent Care Assistance Programs (DCAPs);
Adoption assistance programs;
Employer-provided housing; and
Educational assistance programs.

Takeaways for Employers:

In light of changes to employer-provided benefits under the final tax bill, employers should take the following actions:

Determine whether any changes are needed to retirement plan loan distribution paperwork regarding tax and rollover consequences.
Review qualified transportation plan(s) in light of the changes to qualified transportation fringe benefits and bicycle commuting reimbursements.
Review any company policies that involve recreational, social, or similar activities for employees, employee meals, employee achievement awards, and/or employee moving expenses.
Adjust payroll reporting as necessary and determine whether any taxable amounts are now eligible compensation for retirement plan deferrals and employer contributions.
Consider utilizing the new tax credit for paid family and medical leave.

September 9, 2014

Employee Equity Purchase Programs: Ensuring a Great Idea Remains a Good Idea

By Bret Busacker

With the return of some prosperity in the economy, we have seen an uptick in employers granting or selling equity (stock or partnership interests) in their businesses to their employees. In some cases, these grants are part of a broad-based employee stock purchase program. In other cases, employers use equity to reward and incentivize key players in their business. In all cases, these programs can be very successful in creating loyalty and incentivizing employees. However, these arrangements are subject to a variety of regulatory requirements. A few insights on some common issues that arise with respect to these arrangements:

Sale of Equity to an Employee May be Compensation. The transfer of equity to an employee (or other service provider) in connection with the performance of service to the employer is a compensatory transaction under Internal Revenue Code Section 83. The amount of the compensation income to the employee is the difference between the fair market value of the equity at the time of grant and the amount the employee pays for the equity. Depending on the situation, an independent valuation of the business may be necessary to establish the fair market value of the equity granted. In all cases, the employer should document that a reasonable valuation method was followed in establishing the fair market value of the equity.

Employees May Elect Early Taxation of Unvested Equity. If an equity award requires the employee to continue to provide services after the date of grant in order for the employee to retain the right to the equity, the equity may be unvested. Unvested equity is not taxable to the employee at the time of grant, but becomes taxable to the employee once the equity vests. An employee who believes an equity award will increase in value and generate a larger tax hit on the vesting date rather than the grant date may elect to accelerate the taxation of the equity to the date of grant (and thus pay taxes when the equity is worth less). This election is commonly referred to as an 83(b) election. Employers should ensure that employees are aware of the 83(b) election option.

Unvested Equity May Not Create Ownership. The Internal Revenue Code provides that an employee is not treated as the owner of the equity granted to an employee unless the equity is fully vested or the employee files an 83(b) election with the IRS. Further, employment agreements, operating agreements and shareholder agreements often contain provisions that create ambiguity as to whether an equity award is vested or unvested. Accordingly, if the parties want to ensure that an employee receiving an equity grant is treated as an owner for tax purposes, including allocations, distributions and dividends, a protective Section 83(b) election could be filed to ensure the employee is treated as the owner of the equity.

Equity Grants May Impact Employee Benefits. Equity grants of partnership interests or stock in an S corporation may have a significant impact on the medical and fringe benefits of employees receiving those grants. If the equity is vested or the employee files an 83(b) election, the employee may be treated as an owner for benefits purposes. Partners in a partnership and owners of more than 2% of the stock of an S corporation are generally not eligible to participate on a pre-tax basis in the medical benefits and other fringe benefit programs otherwise available to employees. In addition, employers should review their retirement plans when granting equity awards to employees to ensure that the compensatory value of the equity awards are accounted for in accordance with the terms of the plan document.

Equity Grants Should Be Accomplished Through a Compensatory Plan. In general, unless securities exemptions exists at both the state and federal levels, the grant or sale of employer stock or partnership interests to employees must be registered under the Securities Act of 1933. This rule applies to private non-publicly traded companies as well as publicly traded companies. Many private companies may take advantage of a special federal securities exemption from the registration requirement by satisfying what is referred to as Rule 701. However, Rule 701 and many state securities laws may only be relied upon if the grants were made pursuant to a written compensation contract or compensatory benefit plan for employees, consultants and/or directors. Further, in some cases it may be required, but it is always a good practice, to provide the award recipients a summary of the material terms of the equity award, a risk of investment statement, and annual financial statements to minimize misunderstanding and the risk of legal claims.

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July 3, 2013

ACA Employer Health Care Mandate – “Pay or Play” – Put Off Until 2015

By Elizabeth A. Nedrow

In our Alert a few months ago, we described the so-called “pay or play” penalty provisions affecting employers under the federal health care reform statute known as ACA (the Patient Protection and Affordable Care Act). Yesterday the Obama Administration informally announced that it will delay implementation of pay or play until 2015. Yesterday’s announcement included a promise to publish formal guidance regarding this change within the next week.

Reducing the Complexity of ACA Implementation

The Administration cites complexity of the pay or play requirements as the reason behind this delay in implementation. In response to concerns by businesses that they need more time to understand and comply with the complex law, the Treasury Department states that they are looking to simplify the new reporting requirements. Mark Mazur, Assistant Secretary for Tax Policy at the U.S. Department of the Treasury, wrote: “Just like the Administration’s effort to turn the initial 21-page application for health insurance into a three-page application, we are working hard to adapt and to be flexible about reporting requirements as we implement the law.” Mazur states that the Administration will work with employers, insurers and other reporting entities to voluntarily implement information reporting in 2014 so that they may conduct “real world testing” of reporting systems which should lead to a smoother implementation in 2015.

Look for Additional ACA Guidance Soon

While employers certainly welcome the news that there is more time to comply with ACA mandates, the delay doesn’t mean employers can take the summer off. As noted above, we can expect formal guidance on pay or play implementation in the next week, and additional action may be required after that. In addition, the Administration’s announcement states a hope that employers will voluntarily comply with pay or play in 2014 (including the reporting systems), so that implementation in 2015 will go smoothly. Other provisions of ACA, such as the requirement that individuals have health insurance coverage or pay a penalty (the individual mandate), elimination of pre-existing condition exclusions, and the operation of health insurance exchanges, are still currently scheduled to go into effect on January 1, 2014.

Disclaimer: This article is designed to provide general information on pertinent legal topics. The statements made are provided for educational purposes only. They do not constitute legal advice and are not intended to create an attorney-client relationship between you and Holland & Hart LLP. If you have specific questions as to the application of the law to your activities, you should seek the advice of your legal counsel.