The Senate Tax Bill: A Benefits Perspective

The Senate Tax Bill A Benefits Perspective

This bill does not make dramatic changes to rules governing employer-sponsored plans. So, for now, the HR community can finish enter 2018 without the distraction that more dramatic changes would have been generated. Photo credit Ted Hartz, 2017

The Senate has now passed its version of a revamp to the tax code (H.R. 1).

The legislation makes significant changes to many provisions of the code, including dramatic changes to corporate and individual taxation. The bill now goes on to a conference committee to reconcile differences with the bill passed by the House of Representatives in November.

Significantly, the rules governing employer-sponsored retirement and healthcare benefits were essentially unscathed. However, a number of less visible compensation and benefits programs are impacted by H.R. 1. Here is an overview of the key compensation and benefits provisions:

•      Repeal ACA Individual Mandate. H.R. 1 repeals the individual mandate under the ACA, effective in 2019. This is the only component of the ACA addressed in H.R. 1 and represents the latest stage in an ongoing process of unraveling the ACA.

According to an analysis issued by the Congressional Budget Office last month, this change could result in up to 13 million additional uninsured individuals and a 10 percent premium increase in the individual market. These effects would occur mainly because healthier people would be less likely to buy insurance and the resulting increases in premiums would cause more people to forego insurance.

•      Expand restrictions on compensation over $1 million. H.R. 1 extends the $1 million cap on deductible compensation paid by publicly traded companies to include performance-based pay.

•      Higher Ed and Other Not-for-Profit Entities. H.R. 1 also take rules from the corporate world and applies them to not-for-profits. Specifically, H.R. 1 imposes a new 20 percent excise tax on compensation over $1 million paid by tax-exempt organizations to their five-highest paid employees. H.R. 1 also adds a 20 percent excise tax on “excess parachute payments” made by not-for-profit entities. An excess parachute payment is a payment contingent on separation from service that exceeds three times the individual’s “base amount” (average pay over prior 5 years).

•      Tax Credit for Paid Family and Medical Leave. H.R. 1 adds a new tax credit for employers that offer paid family and medical leave. The tax credit is between 12.5 and 25 percent of the amount paid and is available for leaves up to 12 weeks. The credit is not available for a leave policy that pays an employee less than 50 percent of the wages normally paid to that employee. Also, the credit is not available for any leave required (or paid) by a state or local law; this exclusion will affect employers in New York, California, New Jersey and Rhode Island, as well as a number of cities. The credit is available for 2018 and 2019.

•      Settlements in Sexual Discrimination and Harassment Cases. As part of the changes to corporate taxation, H.R. 1 adds a provision to the Code eliminating the tax deduction for any settlement of sexual harassment or discrimination claims (or the attorney fees associated with such settlement) if the settlement is subject to a nondisclosure agreement.

•      Chained CPI. The method used to reflect increases in the cost of living has been changed to “chained CPI” (which reflects consumer substitution as prices increase). Use of chained CPI is expected to result in lower inflation adjustments in code provisions linked to CPI changes. Most of the significant benefits provisions that are impacted by CPI (such as deferral limits for 401(k)/403(b) plans) will not be affected by this change – these key benefits provisions are linked to CPI as defined under Social Security (which does not used chained CPI). However, some noteworthy benefits-related provisions of the Code will be affected by this change, including the determination of the amount subject to the ACA’s “Cadillac tax” and the maximum permitted IRA contribution.

•      Tax Treatment Miscellaneous Fringe Benefits. Scattered throughout H.R. 1 are a number of changes to the tax treatment various fringe benefits, including the following:
      ◦      As a part of revamping individual income taxes, the reimbursement of moving expenses will not be excluded from income and will not be deductible. This change is effective between 2018 and 2025.
      ◦      As a part of changes to corporate taxation, H.R. 1 eliminates the tax deductibility for qualified transportation fringe benefits, effective for years starting in 2018.

Implications Over the Short – and Long – Term

H.R. 1 (or whatever version of the bill emerges from the conference committee) is likely to have a significant impact on corporate and individual taxation and on the federal budget. And, although there are few direct changes to comp and benefits provisions, these larger changes will have an long-term impact on employer-sponsored plans. For example, elimination of the individual mandate is likely to have longer-term indirect implications for employers: more new hires with untreated medical needs and less access to individual insurance coverage for part-time employees and early retirees. Also, the new tax rates may have the (indirect) effect of making retirement plan sponsorship less attractive to certain business owners.

In the short-term the bill does not make dramatic changes to rules governing employer-sponsored plans. So, for now, the HR community can enter 2018 without the distraction that more dramatic changes would have been generated. It is not clear how long this respite will last.