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What the New U.S. Tax Law Means for Employee Benefits

Repeal of the individual mandate provision in the Affordable Care Act, new tax credits related to the Family and Medical Leave Act, and elimination of some “fringe benefits” including employer-provided commuting and parking benefits: These are just some of the changes from the sweeping tax overhaul legislation signed into law late last month. 

Although tax and HR benefits experts are still interpreting the full impact of the new provisions, it is imperative for employers to know which of their programs may be cut or eliminated.

Here’s a look at some of the key changes employers need to know.

Employers earn a tax credit related to the Family and Medical Leave Act

Starting in the 2018 tax year, employers will receive a tax credit that varies between 12.5 percent and 25 percent of wages they pay an employee who qualifies for and uses the Family and Medical Leave Act.

Employers can claim the 12.5 percent tax credit if they continue to pay the employee 50 percent or more of their normal wages (a minimum requirement for this provision). Employers can claim more, up to 25 percent, if they pay the full wages while an employee takes an FMLA leave.  

Individual health insurance mandate is repealed

Starting in 2019, the Tax Cuts and Jobs Act reduces the mandate penalty to zero, effectively negating this provision of the Affordable Care Act. It is important to note that the ACA employer mandate has not changed, so qualified “large” employers still need to comply with coverage standard to avoid any penalties. 

Business deductions eliminated for employee commuting and parking benefits

Except when necessary to ensure the safety of an employee, the new law removes the deductions businesses can take when providing qualified mass transit and parking benefits to their employees. Employees can still pay for these expenses using pre-tax dollars, but they may no longer receive an employer subsidy to defray the costs. 

Employee achievement awards

The tax-free benefit that applies to employee achievement awards has been a popular way to reward employee performance. The new law, however, defines what counts as “tangible personal property” that a company can deduct for such an award.

However, it expressly excludes cash, cash equivalents, gift cards, vacations, meals, lodging and many other items. This change does not apply to employees who choose from a limited list of preselected items pre-approved by the employer.

Relocation expense deductions

The tax overhaul suspends the tax exclusion and the deduction related to moving expenses for taxable years 2018 through 2025. No tax benefits related to moving are available regardless of whether the employer or employee covers the costs. 

A repeal of some meal deductions

Companies can no longer deduct expenses related to employee meals under the tax law. Employees, however, can still exclude the benefit from their income totals.

If an employer provides food and beverage to employees through an on-site cafeteria or other facility, the existing 50 percent limit to this fringe benefit for onsite eating is extended until the end of 2025. After that date, employer costs related to onsite food and beverage will no longer be deductible.

In general, employer tax deductions for all business entertainment expenses are removed, but employers can still deduct up to 50 percent of specific counted expenses, like non-entertainment client dinners. 

Proposed changes that did not make the final law

It is also essential to know what does not change under the new law. For example, Congress ultimately did not alter employer-provided tuition assistance, the pre-tax status of dependent-care flexible spending accounts, or the minimum age for defined benefit pensions.

In addition, although lawmakers made no major alterations to defined-contribution retirement plans, they did allow some extra time for repayment of hardship distributions in certain cases.

The final version of the tax law also made no changes to the tax exclusion for adoption assistance. The tax credit for employee child-care facilities remains, as well.

Information on withholding is forthcoming

Numerous payroll changes are expected under the new tax law, although they are not all clear yet. For example, the Internal Revenue Service was scheduled to issue guidance on income tax withholding this month. Once the updated withholding tables are released, the IRS will allow a transition and testing period for employers during which they can still use the old withholding tables. 

As always, employers and business owners of all sizes should carefully watch as legislation develops and ensure they remain in compliance with the law.