While early drafts of the Tax Cuts and Jobs Act (TCJA) proposed significant changes to qualified retirement plans, the version that passed has minimal impact on them. However, the TCJA did make some notable adjustments to the tax treatment of other types of employee compensation and benefits, for both employers and employees. Here’s a closer look at two affected areas.
1. Corporate Compensation
Among the changes the TCJA makes to the tax treatment of compensation of corporate executives and employees are:
Enhancements to rules for qualified equity grants. Grants of stock options and restricted stock units (RSUs) are generally offered only to executives. Intended to spur employers to grant some of their stock to rank-and-file employees, the new provision applies to employees other than 1% owners, current or former CEOs and CFOs, and certain highly compensated officers.
Specifically, the provision gives eligible employees who receive compensatory stock options or RSUs a five-year reprieve on the income tax liability incurred when they gain unencumbered access to that economic benefit. The provision generally applies to stock attributable to options exercised or RSUs settled after December 31, 2017. But an important stipulation is that at least 80% of employees must be covered under the stock grant program for this provision to apply.
Tighter limits on excessive employee remuneration. The new tax law expands limits on publicly held corporations’ ability to deduct the cost of certain executives’ pay exceeding $1 million (not counting performance-based compensation). The cap applies to “covered employees,” which, based on pre-TCJA IRS guidance, included the CEO and the other three highest paid officers. Under the TCJA, beginning in 2018, the definition has changed to include the CEO, the CFO and the other three highest-paid officers. The definition now also includes individuals who had been a covered employee in any tax year beginning after December 31, 2016, but no longer are. In addition, in general, performance-based compensation is now included under the $1 million cap on deductibility.
2. Family and Medical Leave Tax Incentives
One noteworthy TCJA provision provides tax incentives for employers to provide paid sick and family medical leave to employees. Five states (California, Connecticut, Massachusetts, Oregon and Vermont) already have mandatory sick leave requirements for private employers. Paid sick leave advocates have been lobbying for years to expand mandatory paid leave nationwide, but the new tax law just takes a carrot approach.
Here’s how it works: To receive a tax credit (available only in 2018 and 2019), employers must grant full-time employees at least two weeks of annual family and medical leave during which they receive at least half of their normal wages. In addition, all less-than-full-time qualifying employees must receive a commensurate amount of leave on a pro rata basis. (Ordinary paid leave that employees are already entitled to doesn’t qualify for the tax incentive.)
Employees whose paid family and medical leave is covered by this provision must have worked for the employer for at least one year, and not had pay in the preceding year exceeding 60% of the highly compensated employee threshold.
The credit is equal to 12.5% of the employee’s wages paid during that leave. That credit amount increases to the extent that employees are paid more than the minimum 50% of their normal compensation, to a maximum of 25% of wages paid. The maximum amount of paid family and medical leave that can be eligible for the tax credit is 12 days per year.
The Road Ahead
Keep in mind that additional rules and limits apply to the provisions discussed here. Also, don’t forget about the TCJA changes to plan loans and Roth IRA recharacterizations. While employee benefits weren’t largely affected by the TCJA, proposals in both the House and Senate that didn’t make it into the law may be an indicator of things to come.
Some Other Benefits Affected by the TCJA
Some Tax Cuts and Jobs Act (TCJA) provisions remove or diminish tax benefits previously available to employers or employees. They include:
Employee achievement awards. Beginning in 2018, the law restricts the definition of employee achievement awards eligible for a tax deduction by the employer and exclusion from income taxation for the employee. “Tangible” achievement awards still qualify, but the following award categories are no longer considered tangible: cash, cash equivalents, gift cards, gift coupons, gift certificates, vacations, meals, lodging, tickets to theater or sporting events, stocks, and bonds.
Moving expense reimbursements. For 2018 through 2025, employees’ ability to exclude from their income the value of employer-provided reimbursements for moving expenses has been removed, with an exception for active-duty military personnel in certain circumstances.
Transportation fringe benefits. Beginning in 2018, employers can no longer deduct the cost of qualified transportation benefits granted to employees, such as qualified parking, transit passes, vanpool benefits and qualified bicycle commuting reimbursements. However, these transportation benefits generally are still excludable from employee income. Exception: The exclusion for bicycle commuting reimbursements is suspended for 2018 through 2026.
Also, beginning in 2018, any expense incurred for providing transportation (or any payment or reimbursement) for commuting between the employee’s residence and place of employment isn’t deductible except if the transportation is necessary for ensuring the safety of the employee.