Now that the Tax Cuts and Jobs Act is law, the burden falls on employers to ensure that their employee benefits program comply with this sweeping rewrite of the Tax Code. Early versions of the tax reform bills made many changes affecting employee benefits. However, during the conference committee process, most of the most impactful changes—including modifications to Code Section 409A and hardship distributions—were removed from the bill before final passage. While the Act may be the most comprehensive rewrite of the Tax Code in decades, it ultimately made only relatively minor changes affecting employee benefits.
| Employee Benefits Topic | Effects of the Act |
| Code Section 409A | No change. Although early versions of the House and Senate bills included language modifying Code Section 409A, which would have greatly changed how many nonqualified deferred compensation plans operate, Congress ultimately removed these provisions. |
| In-Service Withdrawal | No change. The House bill originally included provisions that reduced the minimum age requirement to take an in-service withdrawal to age 59½ for pension plans and governmental 457(b) plans, but Congress ultimately removed these provisions. |
| Hardship Distribution | Early versions of the House and Senate bills would have relaxed the hardship distribution rules in a number of ways, but Congress ultimately removed these provisions. However, the Act imposed a new restriction on hardship distributions taken to repair damage to a participant’s principal residence that are deductible under Code Section 165. The Act limits the casualty deduction under Section 165 to casualty attributable to a federally declared disaster, which narrows the scope of available hardship distributions. |
| IRA Contributions/ Conversions | No change for qualified retirement plans. The Act makes a change to non-Roth and Roth Individual Retirement Accounts, known as Roth IRAs. The Act continues to allow an individual to convert (or recharacterize) IRA contributions to Roth IRA contributions, but the Act prohibits an individual from subsequently unwinding that recharacterization back into IRA contributions. Notably, Roth IRAs are different than Roth 401(k) contributions or accounts, which is why this change does not affect qualified retirement plans. |
| Retirement Plan Loans: Extended Time to Rollover Plan Loan Offset | A plan loan offset occurs generally when a participant takes a loan from a retirement plan and fails to timely make payment when the due date is accelerated (for example, upon termination of employment). In that case, the participant’s account balance is offset (i.e., reduced) by the unpaid loan amount. Prior to the Act, the participant was eligible for a tax-free rollover of the offset amount to another eligible retirement plan within 60 days. Under the Act, the 60-day period is extended to give a participant until the due date of his or her federal income tax return for the year in which the offset occurs in order to avoid the 20% income tax withholding requirement and the 10% early distribution tax, if applicable. |
| Affordable Care Act: Individual Mandate | The Act effectively eliminates the “individual mandate,” which imposes a penalty on individuals who do not have minimum essential health coverage, by reducing the penalty to $0. This change applies for months after December 31, 2018, but does not require employers to make any amendments to plan documents. |
| Affordable Care Act: Employer Shared Responsibility | No change. While the Act effectively repealed the individual mandate, it did not modify the Employer Shared Responsibility provisions. As a result, applicable large employers are still subject to penalties for failing to offer coverage to enough of its full-time employees (the “a” penalty) and for failing to offer adequate coverage to its full-time employees (the “b” penalty), and are still required to comply with ACA reporting requirements. |
| Qualified Bicycle Commuting Exclusion | Prior to the Act, an employee could exclude up to $20 per month for qualifying bicycle commuting expenses provided by the employer. The Act eliminates these tax-free bicycle commuting benefits. Employers may continue to subsidize bicycle commuting, but all such benefits must be reported as taxable income to participating employees for tax years starting after December 31, 2017 (but before January 1, 2026). Employers that offer tax-free bicycle commuting benefits must amend their plans to reflect this change in the law. |
| Qualified Transportation Fringe Benefits | The Act eliminates business deductions for expenses that employers incur in providing qualified transportation fringe benefits. This loss of deduction applies to amounts employers spend on van-pooling arrangements, transit pass programs, qualified parking programs, and bicycle commuting programs—whether subsidizing employees’ transportation expenses or paying the administrative costs of operating these programs. However, employees may continue paying for these benefits through pre-tax contribution programs if offered by their employers. This change in the law does not require employers to amend their plan documents. |
| Entertainment/Meal Fringe Benefits | The Act eliminates the deduction for entertainment, amusement and recreation expenses. Until December 31, 2025, the Act expands the 50% limit on deduction for business meals to include certain expenses associated with providing food and beverages to employees through an eating facility for the convenience of the employer (e.g., on-site cafeteria). |
| Private Company Equity Awards: Deferral of Income Tax | The Act created a new rule that allows certain employees to make an income tax deferral election with respect to income attributable to certain qualified stock awards transferred from the employer to the employee. This election allows eligible employees to defer federal income tax for up to 5 years (subject to certain exceptions). This election does not, however, affect tax obligations for FICA or FUTA. |
| Public Company: Limitation on Excessive Employee Compensation | Generally, a public company may take a tax deduction for reasonable compensation paid for personal services, but that amount is limited to $1 million for certain “restricted employees.” Pre-Act law excluded the following types of compensation when calculating the $1 million limit: (1) performance-based compensation; (2) commission; (3) retirement income from a tax-qualified retirement plans; and (4) amounts excluded from the individual’s gross income. The Act narrowed the exceptions to calculating the $1 million limit by removing performance-based compensation and commission. The Act also expanded the definition of “covered employee” to include the chief financial officer for tax years on or after December 31, 2017, and any individual who was considered a “covered employee” in tax years after December 31, 2016—even if he or she no longer falls within that definition. |
| Tax-Exempt Entities: Limitation on Excessive Employee Compensation | The Act imposes a new excise tax on certain tax-exempt entities that pay certain employees compensation above $1 million. The excise tax also applies to certain parachute payments. Tax-exempt entities generally must pay tax at the corporate rate on the amount paid in compensation for a covered employee in excess of $1 million plus the amount of an excess parachute payment. |
| Employer-Paid Family and Medical Leave | The Act allows certain employers to claim a general business credit equal to 12.5% of the amount of wages paid to certain employees during a family and medical leave (up to 12 weeks) if the amount of pay is equal to 50% of wages normally paid. The general business credit increases by 0.25% (to a maximum of 25%) for each percentage point that the rate of pay exceeds 50%. This new credit is available for tax years after December 31, 2017, but not beginning after December 31, 2019. |
| Length of Service Awards for Public Safety Volunteers | State and local governments and tax-exempt organizations may maintain deferred compensation plans that pay length of service awards to certain public safety volunteers. Under the Act, the accrual limit applicable to these plans increases from $3,000 to $6,000 and is subject to cost-of-living adjustments. The Act also changed the benefit accrual for these types of plans that are defined benefit plans. |