By this point, you’ve likely already read, heard, or consumed some information regarding our country’s recent tax reform. But, in case you haven’t, here’s the skinny: On December 20, 2017, the Senate passed a tax reform bill which will have significant financial implications for our country, for years to come.
The reform, the first of its kind since 1986, was officially enacted beginning January 1, 2018. In addition to affecting finances across the nation, the Trump tax plan will also have a tangible impact on employee benefits plans.
What’s Not Changing?
There are five significant issues the final tax bill left unchanged. These issues are:
- Dependent Care FSAs – The final bill doesn’t eliminate Dependent Care FSAs, nor does it change the pre-tax treatment of employee contributions to these accounts.
- Tuition Reduction & Education Assistance – The bill doesn’t treat employer-provided education assistance as taxable income. Instead, this benefit stays tax-free to employees and a deductible to the employer.
- Adoption Assistance – Same as above.
- Medical Savings Accounts – The final act doesn’t change the favorable tax treatment of Medical Savings Accounts (MSAs)
- HSAs, Health FSAs, and the Cadillac Tax – The bill doesn’t change the tax treatment of HSAs or Health FSAs. Additionally, it doesn’t address the Cadillac Tax.
The new tax plan keeps the seven tax brackets already in place but lowers tax rates across the board. Income levels will increase each year with inflation. Still, these levels will rise more slowly than in the past because they’re now linked to the chained consumer price index.
Income Tax Rate
Income Levels for Those Filing As:
In addition to these lower tax rates, the new plan also doubles the standard deduction. For single filers, this deduction will jump from $6,350 to $12,000. Meanwhile, the deduction for Married-Joint filers increases from $12,700 to $24,000. Also, the new act eliminates the $4,150 personal exemption.
The second, and arguably most compelling, impact the new tax reform will have is lowering the corporate tax. Under the new policy, the maximum corporate tax rate has been slashed from 35 to 21 percent. This number will be the lowest rate since 1939. Similarly, the tax plan raises the standard deduction, for pass-through businesses, to 20 percent.
It’s important to note these deductions will end after 2025. Additionally, the act limits companies’ ability to deduct interest expense to 30 percent of income. Finally, the bill retains tax credits for electric vehicles and electric farms, while cutting the sin taxes on beer, wine, and liquor.
Lessened Taxes, More Pay?
Because of the slashed corporate income tax, a slew of U.S. companies announced they’d be paying bonuses, giving raises to, or improving their benefits for employees. Some companies, such as Comcast and Bank of America announced they’d pay their employees a $1,000 bonus.
Similarly, other firms like BNY Mellon and CVS announced they’d be increasing their minimum hourly pay rate. Still, it’s important to know these bonuses or pay increases are entirely subject to the employer’s discretion. Of the S&P 500, only around 50 firms have increased pay, benefits, or given a bonus to employees because of the tax overhaul.
One of the most important impacts the tax reform will have on employee benefits is the elimination of the individual insurance mandate. This individual mandate, part of the ACA, monetarily penalized Americans who didn’t carry health insurance. Eliminating this penalty, according to the Congressional Budget Office (CBO), will save the government $318 billion over the next ten years.
Though it’s worth noting, without the individual mandate, it’s likely there will be a steady increase in premiums over the next decade. Similarly, changing the penalty is expected to result in 13 million more uninsured Americans by 20217. But the employer mandate is still very much in effect, which makes 1094-C and 1095-C reporting necessary.
In 2017, employee transit benefit programs allowed employees to use pretax dollars to get to and from work. These programs also allowed employers to deduct contributions for:
- $255 per employee per month in transportation expenses
- $255 per employee per month in parking expenses
- $20 per employee per month for biking-related costs
The new tax bill eliminates deductions for qualified mass transit and parking benefits. Though, there’s an exception for instances where the benefit is necessary for the safety of an employee. And these remaining benefits will still be tax exempt for employees. But employers are no longer permitted to deduct contributions to these benefits from their corporate income taxes.
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 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.
Paid Leave Credit
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 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 percentage rises to 25 percent if the worker receives their entire regular earnings.
It’s also important to know there’s 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. Any worker making more than $72,000 a year is ineligible for this tax credit.
Something else the new legislation does is define what can be given as a tax-free achievement award. Now, there are specific awards, considered ‘tangible personal property,’ which aren’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 still too early to tell whether the cumulative effects of this reform will be a net positive for business owners. But continue to check back here for more updates regarding tax reform, as they’re released. We will keep you informed about the Trump tax plan and how it will affect employee benefits and your business as a whole.