7 ways the new tax law impacts retirement plans and employee benefits
From retirement plan loan repayments to paid family and medical leave, and from moving expenses to parking, the 2017 Tax Cuts and Jobs Act (TCJA) features a host of changes to retirement plans and employee benefit programs that companies need to consider.
In some cases, employers may want to alter how they provide certain benefits to avoid tax liability and in others it will be a question of whether the importance to worker morale and retention is worth the non-deductible cost.
The following are seven significant changes to retirement plans and employee benefits included in the new tax legislation:
1. Additional time for employees to repay retirement plan loans
Before TCJA, employees who had an outstanding loan from their retirement plan when they took another job, had 60 days to either repay the loan into an Individual Retirement Account (IRA) or the qualified retirement plan offered by their new employer. If they didn’t repay the loan within 60 days, the amount would be considered taxable income and borrowers younger than 59 ½ had to pay a 10 percent penalty.
The new tax law gives employees more breathing room, allowing them to repay the loan to another eligible retirement account within the employee’s due date for filing federal income taxes including extensions. That means if an employee had an existing loan and took a new job in 2018, they have until October 2019, with a federal extension, to repay the loan.
2. Tax relief for retirement plan distributions related to 2016 major disasters
Distributions from a qualified retirement plan are generally included in income in the year distributed and distributions received before age 59 ½ are subject to an additional 10 percent penalty. The new tax law provides relief for distributions on or after January 1, 2016 and before January 1, 2018, provided that the individual’s principal place of residence was in a presidentially declared disaster area at any time during 2016 and the individual suffered an economic loss due to the declared disaster. The maximum amount eligible for relief is $100,000 and includes the following:
- Relief from the 10% penalty and 20% mandatory income tax withholding
- Taxable income from the distribution can be spread out ratably over a three-year period
- Any portion of the distribution can be recontributed to the plan within a three-year period from the year of the distribution
3. Nobody rides for free
Under the new tax law, employers are no longer able to deduct reimbursements for commuting-related expenses paid to employees, such as parking or mass transit passes, except for reimbursement of transportation needed for the safety of the employee. However, employees can still benefit under a pretax salary reduction plan to help cover these costs.
TCJA also ended the tax exclusion of up to $20 a month in reimbursements for employees who rode their bicycle to work. Under the new law, costs associated with bicycle commuting are no longer deductible, at least through 2025 when the suspension is due to expire.
4. That gift certificate is taxable
Companies looking to award employees for safety or other achievements need to be careful about the kind of gift they give. Under TCJA, tangible personal property gifts such as plaques, gold watches, trophies and the like are still tax exempt up to $400 per award with a maximum of $1,600 per employee. But gift cards, gift certificates, tickets to sporting events or the theater, an expense-paid vacation and other intangible awards are now generally considered part of an employee’s taxable compensation.
5. Biting into the free lunch
The new tax law chomped into meal and entertainment expenses in various ways. However, some good news is that office holiday parties and summer picnics remain 100 percent deductible. Likewise, business meals, including those connected to travel, remain 50 percent deductible.
Two changes to note:
- Client entertainment expenses are no longer deductible. Previously, such expenses were 50 percent deductible, including the face values of tickets – and tickets to qualified charitable events were fully deductible.
- Employers who provide meals to employees at a facility either at or near the place of employment are now 50 percent deductible; they were entirely deductible previously. The deduction ends after 2025.
6. Move on your own dime
Many companies have included reimbursement for moving costs as an employee perk, but the new tax law makes those payments part of a worker’s taxable income. The only exceptions are expenses paid to a member of the military on active duty moving due to orders. The taxability of moving cost reimbursements is scheduled to sunset on Jan. 1, 2026, meaning after that date the perk will again be deductible.
7. Getting credit for paid family and medical leave
Employers can receive a tax credit of 12.5 percent up to 25 percent of wages paid to qualifying employees taking time off under the Family and Medical Leave Act (FMLA), but certain caveats apply:
- Employers must provide at least two weeks of leave under FMLA and pay the employee at least 50 percent of their regular wages.
- Employees need to be with the company for at least a year to be eligible.
- The credit only applies to employees earning 60 percent or less than the threshold for highly compensated employees, equivalent to earnings of $72,000 or less in 2018.
TCJA requires companies to immediately review their retirement plan provisions and employee benefit practices to ensure not only compliance with the new law, but also a full understanding of any increased tax liability. Business owners are well advised to consult with a professional accountant or CPA who fully understands the complexities and nuances.
It’s also essential for tax-exempt organizations to take a careful look at any fringe benefits they offer employees. Under TCJA, these may trigger additional unrelated business income tax (UBIT) liability.
With proper planning, employers may be able to keep offering benefits and perks deemed important to employee retention and morale in a way that doesn’t result in year-end tax sticker shock.
Kimbarley A. Williams, CPA, and Crystal A. Skotedis, CPA, are co-leaders of Boyer & Ritter’s Employee Benefit Plan Services Group and have extensive experience auditing and managing various types of employee benefit plans. Contact Kim or Crystal at 717-761-7210 or firstname.lastname@example.org / email@example.com.