The Tax Cut and Jobs Act leaves employer-sponsored retirement and health plans unscathed. Other compensation and benefit plans were not so lucky.
The proposed Tax Cut and Jobs Act (“TCJA”) has generated big news stories with big numbers, such as $1.0 trillion to lower some individual tax rates and $1.5 trillion to lower corporate tax rates. But, also lurking in the 430-page draft, are many important “smaller” provisions that will affect compensation and benefits programs.
Overall, TCJA reduces federal revenue from individual and corporate taxes and recoups some of that lost revenue by eliminating a number of tax deductions. Major deductions impacted by TCJA include the deduction for interest on home mortgages and the deduction for state and local taxes. Significantly, the tax treatment of retirement and healthcare benefits is (for now) unscathed by TCJA. However, a number of less visible compensation and benefits programs are impacted by TCJA. Here are some of the proposed changes that may have been overshadowed by the headline stories:
• Eliminate many types of nonqualified deferred compensation plans. TJCA repeals Section 409A of the Code and requires that deferred compensation is taxable when there is no longer a substantial risk of forfeiture (i.e., receipt of compensation is no longer subject to future performance of services). TJCA also eliminates the ability of nongovernmental not-for-profit employers to utilize Section 457 of the Code to establish deferred compensation plans. These changes apply to services performed after 2017.
• Ease rules for hardship distributions. TCJA eases restrictions on hardship distributions from retirement plans, eliminating the 6-month suspension current imposed and allowing access to employer contributions.
• Eliminate various employment-related tax exemptions. A number of employee benefit programs will lose tax-favored status, including dependent care assistance, adoption assistance, reimbursement of moving expenses and education assistance.
• Defined benefit pensions. Allow in-service distributions from pension plans at 59-1/2 (rather than 62) and provide some relief from nondiscrimination testing for closed and frozen DB plans.
• Expand restrictions on compensation over $1 million. TJCA extends the $1 million cap on deductible compensation paid by publicly traded companies to include performance-based pay. TJCA also imposes a new 20 percent excise tax on compensation over $1 million paid by tax-exempt organizations to their five-highest paid employees.
• Deduction for Health Care Expenses. TCJA eliminates the individual deduction for health care expenses over 10% of income.
TJCA also included a number of provisions that are specifically relevant for colleges and universities. These include eliminating the tax favored treatment of tuition reduction plans offered to employees of colleges and universities and a 1.4 percent excise tax on net investment income of the endowments of private colleges and universities.
As evidenced by the debate over health care, Republican majorities in the House and Senate do not assure a smooth legislative process. Stay tuned.