Tax Cuts and Jobs Act – Impact on Employee Benefit Plans

January 9, 2018

On December 22, 2017, President Trump signed the Tax Cuts and Jobs Act (the “Act”) into law.
While the Act is extensive, this Advisory discusses only the changes made to employee benefits such as qualified retirement plans, fringe benefits and health and welfare plans. Although the initial drafts of the House and Senate Bills provided for many changes to employee benefit plans, many provisions were removed from the final Act.

Qualified Retirement Plans

Tax-Free Rollovers of Loan Offsets: Most qualified retirement plans (such as 401(k) plans), 403(b) plans and governmental 457(b) plans provide that, upon separation from service, a participant’s obligation to repay a plan loan will be accelerated. If the loan is not repaid, the participant’s account balance will be offset by the amount of the unpaid loan. The offset will be treated as a distribution from the plan, which triggers current income taxation (and, in most cases, a 10 percent early withdrawal penalty). Alternatively, under preexisting law, the offset amount could instead be treated as a direct rollover if, within 60 days, the participant makes an equivalent contribution equal to the loan offset to an IRA or other eligible retirement plan.

Effective January 1, 2018, the Act extends the 60-day period to complete the direct rollover of a loan offset to the due date (including extensions) for filing the participant’s federal income tax return for the year of the offset. This change provides participants an extended opportunity to avoid early distribution penalties and a permanent reduction to their tax-sheltered retirement savings. This provision is available only to plan loan offsets arising from a participant’s failure to repay the loan due to separation from service or plan termination.

Employers should consider whether their loan procedures and/or participant communications need to be revised to reflect this change.

Fringe Benefits and Health and Welfare Plans

Very limited changes were made for fringe benefits and welfare plans:

  • Qualified Transportation: Effective for amounts paid or incurred after December 31, 2017, employers may no longer deduct expenses associated with providing, paying or reimbursing employees for transportation fringes including qualified parking, transit passes, or vanpool benefits except as necessary to ensure employee safety.
    • However, this benefit would continue to be tax exempt to employees who could pay for such commuting and parking expenses using pre-tax income.
  • Qualified Bicycle Commuting Reimbursement: Effective for taxable years beginning after 2017 (with a sunset provision of 2025), employees may no longer exclude from gross income or wages reimbursements for bicycle commuting.
  • Qualified Moving Expense Reimbursements: Effective for taxable years beginning after 2017 (with a sunset provision of 2025), employees may no longer exclude from gross income or wages reimbursements for moving expenses, except in the case of a member of the Armed Forces of the United States on active duty who moves pursuant to a military order.

Additional Changes of Interest to Employers

Although the following changes may not directly impact fringe benefits and health and welfare plans, please note the following:

  • Individual Health Coverage:
    • Effective in 2019, individuals will not be penalized for failing to purchase minimum essential coverage (which may cause fewer employees to elect group health coverage from employers).
    • The employer mandate still applies to employers with 50 or more full-time equivalent employees.
  • Employer Credit for Paid Family and Medical Leave (“FMLA”): Effective for wages paid for taxable years beginning after 2017 (with a sunset provision of 2019), employers will receive a tax credit of 12.5% to 25% of wages paid to a “qualifying employee” taking leave under the FMLA for up to 12 weeks if the rate of payment under the program is at least 50% of the wages normally paid to the employee.
    • The employer must provide full-time employees with at least two weeks of leave under FMLA (and a pro-rata amount of leave for less-than-full-time employees). Leave does not include vacation, personal or other medical or sick leave or leave paid for or mandated by a state or local government.
    • A qualifying employee is an employee who has been employed by the employer for one year or more and who, for the preceding year, had compensation of 60% or less of the compensation threshold for highly compensated employees ($120,000 for 2018).

The following fringe benefits remain unaltered after changes to these provisions were threatened but not included in the final Act:

  • Adoption Assistance Programs;
  • Dependent Care Assistance Programs;
  • Employer-Provided Child Care Credit;
  • Employer-Provided Educational Assistance; and
  • Employer-Provided Housing.

If you have any questions about this Client Advisory, please contact a member of our Employee Benefits Group.

Sherman & Howard has prepared this advisory to provide general information on recent legal developments that may be of interest. This advisory does not provide legal advice for any specific situation and does not create an attorney-client relationship between any reader and the Firm.