EMPLOYER ACTION CODE: ACT
President Trump has signed tax reforms (H.R.1, the Tax Cuts and Jobs Act) into law. Most of the law’s provisions will apply for taxable years beginning after December 31, 2017. In addition to its core income tax provisions, including reductions to corporate and individual tax rates, the Act will change the tax treatment of certain aspects of employee compensation and benefits.
For further insights and analysis regarding the tax reform provisions and implications, please see Keeping current with U.S. tax reform. Details of the new law will also be discussed during a January 4, 2018, audio-only call (register here).
Notable provisions on employee compensation and benefits include:
- US$1 million will be a hard cap on deductible compensation for anyone who holds the CEO or CFO position at any time during the tax year, as well as the three highest-paid officers during the year. Currently, under Internal Revenue Code section 162(m), qualified performance-based pay (e.g., performance bonus, stock options/appreciation rights) is treated as an exception to the US$1 million annual cap on compensation that employers may take as a tax deduction for the CEO and three highest-paid officers (excluding the CEO and CFO) at the end of the year. The bill eliminates this exception, effective January 1, 2018. The bill also expands the definition of a “covered employee” to specifically include the CFO, and provides that any such employee in that group during any year (starting with the 2017 tax year) continues to be a covered employee as to any compensation paid by the company in future years, including after retirement.
- In addition, the bill expands the definition of companies subject to section 162(m), the most consequential effect of which is that certain foreign companies that are publicly traded through an American Depository Receipt (ADRs) may now be subject to 162(m).
- Tax-exempt organizations will be subject to a 21% excise tax on any remuneration paid to their top five highest paid in excess of US$ 1 million. An identical excise tax will also be triggered on amounts over a threshold paid upon separation from service.
- Only certain employee achievement awards that are considered “tangible personal property” will be deductible to the employer and excludible from employee income. These will not include cash, cash equivalents, gift cards, gift coupons or cash-based gift certificates, vacations, meals, lodging, tickets to theater or sporting events, stocks, bonds or other securities.
- Deductions are curtailed or eliminated for (1) entertainment, amusement or recreation; (2) club dues for business, pleasure, recreation or other social purposes; (3) a facility used in connection with any of the above items; (4) providing any qualified transportation fringe benefits; and (5) most commuting expenses. Employers can still deduct the expenses for certain on-premises eating facilities. Companies will no longer be able to deduct most reimbursements provided to employees for moving expenses, nor can employees exclude those amounts from income if reimbursed by their employers.
- Employers that offer paid family and medical leave programs that meet specified conditions will be eligible for a temporary tax credit.
- The individual mandate penalty, introduced by the Affordable Care Act (ACA), will be US$0 after December 31, 2018. (The mandate requires individuals to purchase health insurance if they don’t have coverage from employment or other sources.) There is no change to employer requirements under the ACA.
- The employee tax exclusion for qualified bicycle commuting benefits is suspended for taxable years beginning after December 31, 2017, and before January 1, 2026.
- “Chained CPI” (C-CPI-U) will be used to measure many tax parameters in the Internal Revenue Code, including the threshold for the Affordable Care Act’s 40% excise tax on high-cost group health plans, the cap on salary reduction contributions to Health Spending Accounts and other limits. The C-CPI-U is expected to result in lower annual increases to these limits.
The implications of the legislation will vary depending on an employer’s circumstances, benefit offerings and other factors. Employers should review the final provisions and obtain tax counsel where appropriate to determine whether any actions are necessary or advisable (e.g., possibly accelerating tax deductions for contributions to qualified retirement plans).
In particular, companies affected by section 162(m) should get tax advice on certain unclear points regarding application of the transition rule in the bill.