On December 20, 2017, the Senate passed a tax reform bill that will have significant financial implications for the country. The reform, the first of its kind since 1986, will add $1.46 trillion to the national debt over the next ten years. And while this bill won’t affect anyone’s 2017 taxes, it will affect employee benefits over the coming years.
According to the Society for Human Resource Management (SHRM), tax reform will impact employee benefits plans through multiple facets. It remains to be seen whether this impact will be a net positive or negative. But it will have a significant impact nonetheless.
Read more about how tax reform will impact your employee benefits.
Tax Reform and Employee Benefits
The first, and arguably most important, impact the tax reform will have on benefits, is the change to the individual insurance mandate to from 2.5 to zero percent. The individual mandate, part of the ACA, penalized Americans who don’t carry health insurance.
Changing this penalty, according to the Congressional Budget Office (CBO), will save the government $338 billion over the next decade. Its impact on health premiums across the board may counteract these savings. But the change of this penalty is likely to result in an estimated 13 million more uninsured Americans by 2027.
Similarly, according to the CBO, changing this penalty could lift premiums in the individual marketplace, by an estimated 10 percent. Note: It’s important to highlight that this is a change in the mandate and not a repeal. This change means a future Congress can change the penalty back to what it previously was, or even increase the amount, in the future.
In 2017, employee transit benefit programs allow employees to use pretax dollars to get to and from work. These programs also allow employers to deduct contributions of:
- $255 per employee per month in transportation expenses
- $255 per employee per month in parking expenses
- $20 per employee per month for biking-related expenses
The new tax bill eliminates deductions for qualified mass transit and parking benefits. Note there is an exception for instances where the benefit is necessary for the safety of an employee. But these benefits will still be tax exempt for employees. It is employers who will be subject to the tax on unrelated business income for any qualified transportation benefits.
Paid Leave Credit
On a (potentially) more positive note, the bill also creates a tax credit for employers who provide paid family and medical leave. Applicable employers can receive a business credit equal to a percentage of wages paid to qualified employees on leave under the Family and Medical Leave Act (FMLA).
There are specifics an employer must prove to receive the credit. To earn this credit, an employer must:
- Have provided at least two weeks of leave; and
- Compensate their workers a minimum of 50 percent of their regular earnings.
The credit will range from 12.5 to 25 percent of the cost of each hour of paid leave provided. The government will cover 12.5 percent of the benefit’s costs if the employee receives half of their regular earnings. This percent rises up to 25 percent if the worker receives their entire regular earnings.
Still, it’s important to know there is a stipulation to receiving this tax credit. Employers will only be able to apply for the credit for employees who earn less than $72,000 per year.
Previously, employers could pay for a worker’s moving expenses due to a new job or relocation. And, the amount paid wasn’t taxable to the employee. Now, the value of the moving benefit is included as taxable income for the employee. Additionally, the deduction for these expenses has also been eliminated for individual taxpayers.
It’s worth noting, moving expenses will remain tax-free for members of the military who are on active duty or move under to military order. So, if employers don’t want to shift the costs of moving to their staff, they’ll have to bear these expenses themselves.
Something else the new legislation does is to define what can be given as a tax-free achievement award. Now, there are specific awards, considered ‘tangible personal property,’ that isn’t considered taxable income to the employee and cannot be characterized as a business expense by the employer.
The awards considered ‘tangible personal property’ include:
- Cash equivalents
- Gift cards
- Gift certificates
- Tickets to theater or sporting events
It’s also important to know the bill cuts the corporate tax rate from 35 to 21 percent. Obviously, this cut should be a boon to business. But we still don’t know if this tax reform will be a net positive or negative for business owners. As detailed above, there is also a possibility these effects have a negative impact on your organization by adversely affecting employee benefits.
For business owners, it’s too soon to tell what the cumulative effects of this reform will be. Check back here for more updates regarding tax reform, as they are released. We will keep you informed about this bill and how it will affect employee benefits and your business as a whole.