As life with the new Tax Cuts and Jobs Act (TCJA) settles in, confusion remains in the tax-exempt organization industry with respect to what has changed or not changed in regards to employee benefit packages. Questions have arisen concerning the TCJA’s complex treatment of various benefits and perks that have been historically offered to an organization’s employees. The following list is meant to be an information summary only and not comprehensive representation of the law. A deeper dive into the details of the new law can be found in RSM’s tax reform for exempt organizations resource center.
The following are brief descriptions of the most common benefits offered to employees with a brief description of the changes contained in the new tax law or whether or not there were no changes made to the prior law:
- Health, dental, life, long term disability and 401(k)/403(b) benefits – no changes made to prior law
- Employee achievement awards have not been eliminated, only clarified. The requirements for length of service awards, safety awards and awards given during meaningful presentations are the same as in prior law. What the new law does is clarify what types of gifts will be considered tax free to the employee:
a. For example, if an organization gives cash, cash equivalents, gifts cards, vacations, meals, lodging, theater tickets, stocks, bonds or similar items, the organization will be required to treat the value of these items as taxable income to the employee receiving the award.
- Employer operated on-premises gym or athletic facilities remain a non-taxable benefit if the facilities are used substantially by all employees. Caveat: If the facilities are only used by highly-compensated employees, and the amounts are not to be included in the highly-compensated employee’s taxable compensation, a review will need to be performed for possible unrelated business taxable income issues (more on this issue later).
- Bicycle commuting reimbursement is now a taxable benefit to employees.
- Employer provided pretax transportation benefits are now considered unrelated business taxable income to the exempt organization providing this benefit. In addition, even amounts withheld from the employee’s pay pre-tax are most likely also considered unrelated business taxable income (although such amounts continue to be excludible from the employee’s W-2 taxable income).
a. These amounts will be required to be included on the Form 990-T even if the organization has no other unrelated business taxable income.
b. If these benefits are instead included in the employee’s taxable income, the organization will not have unrelated business taxable income.
c. Some local jurisdictions require employers to offer certain mass transit and parking benefits to their employees pre-tax.
i. For example, DC-based organizations with more than 20 employees are required by DC law to provide pretax mass transit benefits to their employees. Because of this local law, DC-based organizations will be unable to not provide to its employee’s this pre-tax benefit in order to avoid the unrelated business taxable income taint.
ii. The DC requirement is limited to mass transit benefits. The parking benefit can be made taxable to the employees, thus permitting the organization to avoid UBI treatment for the parking benefit amounts
iii. It is highly recommended that you review what your specific local jurisdictional requirements may be, if any.
- Under the new tax law, a tax-exempt organization is liable for an excise tax equal to 21 percent of the sum of the remuneration paid to a covered employee in excess of $1 million for a tax year. A covered employee is:
a. One of the five highest paid employees for the taxable year paid over this $1 million threshold,
b. Was considered one of the five highest paid employees under the above test (or any predecessor entity) for any preceding taxable year beginning after Dec. 31, 2016.
A careful review and study of the rules should be conducted by all organizations that are paying, have paid or will pay an employee more than $1 million in compensation during a calendar year, as the 21 percent excise tax is payable by the organization and not withheld from the pay of the covered employee in question. This excise tax does not apply to a licensed health care employee that receives their compensation for delivering medical services.
As mentioned earlier, the new law is complex. Care must be taken when reviewing your current benefits package as to how the new law may or may not impact those benefits not only to the employee, but also to the organization. In addition, look for Congress to weigh in and the IRS to issue regulatory guidance to assist in the proper application of many of the new tax laws that were a part of the TCJA. For more information, visit RSM’s Tax reform for exempt organizations resource center.