Major tax reform in the form of H.R.1, often referred to as The Tax Cuts and Jobs Act, signed into law Dec. 22, 2017, makes some notable changes to compensation and employee benefits. While some changes allow for transition periods, others require employers to begin implementing the new laws as early as Jan. 1, 2018. Therefore, employers should consider giving prompt attention to the various areas that may affect the compensation and benefits landscape because of the new legislation.
In general, the changes to the following fringe benefit laws either repeal, suspend, or limit the provisions that allow employer deductions of expenses incurred in providing, paying, or reimbursing employees effective Jan. 1, 2018.
- Transportation benefits
- Qualified moving expense reimbursements
- Qualified bicycle commuting reimbursement
- Meals and entertainment or travel expenses
Because of the benefit disallowances and limitations, an employer that offers such benefits, will need to evaluate whether these benefits are worth the cost. An employer could take one of the following approaches:
- Continue the program as is and forego the deduction on the amount of benefit provided
- Discontinue the program and make direct cash payments to employees as additional taxable (and deductible) wages
- Discontinue the program without additional cash payments
- Adopt some variation of the options above
Depending on the decision, many employers will need to make changes to their payroll systems to reclassify or recognize these amounts as taxable wages subject to reporting on Form W-2 and income and payroll tax withholding.
Furthermore, employers should consider if these changes will affect the definition of compensation within their qualified retirement plan for salary deferral and employer contribution purposes, as well as the impact to nondiscrimination testing. It may be helpful to determine if amending plan terms would effectively satisfy compliance, or whether making modifications to the payroll system to be properly coded for these purposes is sufficient.
Another payroll issue to consider is the withholding changes due to the changes in individual rates and personal exemptions. With the elimination of personal exemptions for federal tax purposes, the IRS needs to change its withholding tables. Fortunately, a transition period, set by the IRS, allows for the use of 2017 percentage income withholding methods through sometime in 2018. However, employers should be prepared to react promptly when the IRS issues new tables or guidance.
Additionally, employers should review whether payroll adjustments are needed for supplemental wages (e.g. equity awards) paid in 2018 before new withholding rates are issued. Although a transition period is available for tax purposes, Financial Accounting Standards Board (FASB), looks to the maximum statutory rate in the applicable jurisdiction to determine equity classification treatment for share-based awards. If an employer withholds shares in an amount in excess of the statutory rate, FASB requires the employer to classify the award as a liability.
Similar to other areas of the tax reform law, the compensation and benefit related changes require employers to reevaluate some policies. Making timely updates and proper reporting will require coordination between employers, payroll providers, and third party administrators, in most cases.