The enactment of the Tax Cuts and Jobs Act (TCJA) on December 22, 2017, brought the most sweeping overhaul of the Internal Revenue Code (IRC) since 1986. Most of the changes took effect January 1, 2018. This article discusses the TCJA’s impact on employer provided fringe benefits and our insights, based on conversations with employers across the country, on how the changes may influence an employer’s fringe benefit offerings over the years to come.
Relevant provisions: IRC §§ 132(g) & 217; TCJA §§ 11048-11049
Prior to the enactment of the TCJA, “qualified moving expenses” were excluded from an employee’s income and deductible by the employer. Qualified moving expenses generally included expenses incurred for moving personal belongings and persons from one’s old residence to one’s new residence.
The TCJA suspended the qualified moving expense exclusion and employee deduction for moving expenses that are not paid for or reimbursed by the employer. Now the amount must be reported as compensation for services and withheld upon (except with respect to certain active duty members of the armed forces).
This applies whether the employee incurs the moving company expense amounts directly (i.e., the individual contracts with the moving company, pays the moving company, and seeks reimbursement from the employer) or indirectly (i.e., the employer contracts with the moving company and pays the moving company for the benefit of the individual).
The TCJA did not change the requirements relating to the employer’s deduction for employer-provided moving expenses. The TCJA provisions take effect in 2018 and sunset at the end of 2025.
Employers are struggling to understand the impact this provision may have on their relocation program budgets. To the extent the employer wants to make the employee whole for moving expenses, a gross-up may be considered so that the “net payment” amount equals the cost of the moving company expense. However, gross-ups can be costly. Alternatively, some employers are contemplating the use of a one-time bonus (also taxable) to offset the relocation costs an employee may incur, while also controlling the program’s cost.
Relevant provisions: IRC §132(f); TCJA §§ 11047 & 13304
Qualified transportation fringe benefits (QTFBs) include the provision of transit passes, qualified parking, transportation in a commuter highway vehicle, and qualified bicycle commuting reimbursements by an employer to an employee on a tax-free basis for purposes of commuting between the employee’s residence and workplace.
While the costs associated with such benefits, whether paid directly, reimbursed, or taken through salary reduction arrangements, have afforded employers a deduction to this point, the TCJA has repealed an employer’s ability to deduct the associated costs after December 31, 2017. Employers may still deduct expenses incurred that are necessary to ensure the safety of an employee (i.e., late-night transportation) and business travel expenses.
Employees, on the other hand, still may elect a pretax salary deferral and/or exclude from income employer provided transit passes, qualified parking, or transportation in a commuter highway vehicle. However, employees can no longer exclude qualified bicycle commuting reimbursements (up to $20 per month) from income for tax years 2018 through 2025.
Absent the ability to deduct the costs associated with QTFBs, employers are assessing the viability of such fringe benefits prospectively and pondering tax advantageous alternatives, such as enhancing the compensation packages of employees who participate in such plans. The enhancement of compensation packages may be a deductible expense if the “ordinary and necessary” standard identified under IRC Section 162 for salaries and other compensation is satisfied.
In turn, employees could use the enhanced pay package to subsidize the costs associated with their purchase of transit passes, parking, or other commuting methods. However, certain employers in certain jurisdictions (e.g., New York City, San Francisco, and Washington, D.C.) are required by local law to offer employees a pretax deferral or employer subsidy to offset commuting expenses.
It remains unclear whether the IRS will permit employers to deduct the cost of providing QTFBs as ordinary and necessary compensation expenses if paid for by a salary reduction arrangement, though the Service has indicated it will be issuing an updated version of Publication 15-B, Employer’s Tax Guide to Fringe Benefits, that incorporates the TCJA changes and addresses such concerns.
While the loss of the tax deduction will make QTFBs more expensive, we expect most employers to continue offering such benefits (including bicycle benefits, to the extent already offered) to stay competitive and comply with state and local laws.
For tax-exempt employers, where the loss of the deduction would have no relevance, the TCJA instead treats the funds used to pay for QTFBs as unrelated business taxable income (UBTI). Also, any costs associated with a tax-exempt employer’s provision of an onsite gym for employee use will be subject to UBTI.
In part two of this article, we’ll look at how the TCJA impacts employer provided meals and entertainment, employee achievement awards, and other fringe benefits.
|Vicki M. Nielsen is a shareholder in the employee benefits and executive compensation practice of the Washington, D.C. office of Ogletree Deakins. She has worked extensively in executive compensation arrangements, equity compensation and taxation of benefits provided to executives, employees, directors, and independent contractors and related payroll tax issues. Ms. Nielsen regularly advises clients regarding fringe benefits, with an emphasis on income and payroll tax treatment, information reporting, tax penalties, and corrections and penalty abatement options. She is a contributing editor to BLR’s Employer’s Guide to Fringe Benefit Rules.
Michael K. Mahoney is a member of the employee benefits and executive compensation group at Ogletree Deakins. He focuses on employment tax matters at both the federal and state levels, the review of labor and tax laws governing qualified plans, and the strategic design of executive compensation plans for a global workforce. Mr. Mahoney advises employers on a multitude of fringe benefit issues including tax advantageous means of structuring such benefits. He routinely helps clients resolve payroll audits, working with federal and state authorities to reduce assessments on behalf of employers.