Changes to Employee Benefits Resulting from Tax Reform

Filed under: Not-for-Profits, Private Business

The Tax Cuts and Jobs Act, signed into law on December 22, 2017, contains provisions that directly impact certain benefits commonly provided to employees. Employers should be aware of these changes and the effective dates of each change, as it may require changes to payroll, federal income tax withholding, and both the employer and employee share of payroll taxes. Employers should understand these changes and update payroll procedures as soon as possible.

Bicycle Subsidies

Beginning on January 1, 2018, amounts an employer provides to employees to subsidize commuting by bicycle must be included in the employees’ taxable wages. Prior to 2018, employers could provide up to $20 a month to employees commuting by bicycle and exclude this amount from taxable compensation for its employees.

Effective date: calendar year 2018 through 2025.

Achievement Awards

Achievement awards include length of service awards and safety achievement awards. Within certain parameters, achievement awards may be treated as tax-free to employees. While this continues to be true post-tax reform, The Tax Cuts and Jobs Act formalizes and makes permanent a prior, temporary rule that indicated awards of a certain type are not eligible for this tax-free treatment for the recipient of the award. Types of awards that are taxable to the employee include cash, cash equivalents, gift cards or certificates, vacations, meals, lodging, tickets to theater or sporting events, stocks, bonds, other securities, and other similar items. Gifts of tangible personal property continue to qualify as tax-free to the employee assuming the other achievement award requirements are also met.

Effective date: January 1, 2018.

Moving Expense Reimbursements

Beginning on January 1, 2018, amounts an employer reimburses to an employee for qualified moving expenses must be included in the employee’s taxable wages. Prior to 2018, certain moving expenses were eligible to be reimbursed tax-free to the employee. What is unclear at this point is the treatment of a situation in which the employee incurred and paid moving expenses in 2017, but the employer reimbursement was not paid until 2018. The AICPA submitted a request for clarification on this matter in a letter sent to the Department of the Treasury and the Internal Revenue Service on January 29, 2018.

Effective date: calendar year 2018 through 2025.

Family Medical and Leave Act (FMLA) payments

Employers that compensate employees while on family or medical leave under FMLA may be eligible for a federal tax credit equal to a percentage of the cost of each hour of paid leave. The credit is only available for paid leave to an employee earning below $72,000 per year, and the employee is compensated at least 50% of his/her regular earnings while on leave.

The credit ranges from 12.5% to 25% of the paid leave and is claimed as a general business credit on an income tax return filed by the employer. To the extent family or medical leave is required to be paid pursuant to state or local law, the federal credit may not be available. Wages paid in excess of amounts required by state or local law may qualify for the credit. States currently mandating paid family and medical leave include California, New Jersey, New York (effective January 1, 2018), and Rhode Island. Washington State’s paid family and medical leave program begins January 1, 2020.

Effective date: calendar year 2018 and 2019 only.

Transportation Benefits

The tax reform changes to certain qualified transportation fringe benefits (excluding bicycle subsidies, discussed above) are covered in detail in the following articles. Employers that decide to treat transportation benefits as taxable wages to employees are encouraged to make this decision sooner rather than later. Delaying the decision to later in 2018 may mean “catch-up” withholding is required, which directly impacts the cash employees receive with each payroll deposit. For lower income employees, catch-up withholding later this year may have a detrimental impact on an individual’s or family’s budget. Employee relations may also suffer if catch-up withholding is necessary at a later date in the year.

In its letter dated January 29, 2018, the AICPA requested clarification from the Department of Treasury and the IRS that nonprofit employers electing to treat the employer-paid transportation benefits as taxable to employees will avoid unrelated business income tax on the benefits.

For businesses: Tax Reform and Employee Benefits: Should Benefits be Treated as Exempt or Taxable?
For nonprofit employers: Non-Profits are Employers Too! Certain Employee Benefits May be Subject to UBI After 2017
Treasury guidance needed: Treasury Guidance Needed on the Gap Between Taxable and Tax-Free Employee Benefits

Effective date: January 1, 2018.

Questions?

If you would like assistance discerning how the change in the tax law may affect your organization, your employers, or your employees, please contact your Clark Nuber tax advisor.

This article or blog contains general information only and should not be construed as accounting, business, financial, investment, legal, tax, or other professional advice or services. Before making any decision or taking any action, you should engage a qualified professional advisor.