Federal Legislation Impacts Employee Benefit Plans (Benefit Minute)
This Benefit Minute provides an overview of benefit-related items in the new tax reform law and in the short-term continuing resolution that ended the partial federal government shutdown and funded the government through February 8th.
Short-term Spending Bill
Benefit-related items in the short-term spending bill include:
- Two-year delay in the 40% excise tax on high cost employer-sponsored health plans (the cadillac tax). This tax was originally slated to be effective in 2018, has been delayed once until 2020 and is now further delayed until 2022. While there continues to be bipartisan support for a full repeal, the cadillac tax was intended to generate revenue and there is no agreement on how that revenue would be replaced if the tax were fully repealed.
- One year suspension of the tax on health insurers. This tax raises revenue based on the market percentage of each health insurance carrier. This tax was originally effective in 2014, was suspended for 2017, in effect again for 2018 and now has been suspended for 2019. The cost of this tax is built into the premiums that health insurers charge group health plans, so plan sponsors may again see relief in their premium rates at upcoming renewals.
- Two-year suspension of the tax on medical devices. This tax had already been suspended for 2016 and 2017 and is now further suspended for 2018 and 2019.
- Authorization of funding for the Children’s Health Insurance Program (CHIP) for another six-year period. Group health plan responsibilities, including notification of CHIP special enrollment rights and the availability of CHIP premium assistance will continue to apply.
Tax Reform Bill
The primary focus of the tax reform bill was rate reduction and tax code simplification. However, the bill that was passed includes several items that impact benefit plans and fringe benefits offered by employers. These include:
- Effective 1/1/2019, elimination of the tax penalty for individuals who fail to maintain minimum essential coverage (the individual mandate). The individual mandate and related reporting remains in effect for 2018. Impact on group health plans may be mixed: fewer employees may choose to enroll if there is no penalty for not having coverage or more employees may choose to enroll as a result of expected increases in individual market premiums (due to adverse selection).
- Beginning in 2018, certain benefit-related amounts that are subject to inflation adjustments will be adjusted based on the Chained Consumer Price Index for All Urban Consumers (C-CPI-U) instead of the Consumer Price Index for all Urban Consumers (CPI-U) that is currently used. The C-CPI-U tends to increase at a lower rate than the CPI-U. For example, as a result of this change, health savings account annual contribution limits and healthcare flexible spending account salary reduction maximums are expected to increase more slowly over time, thereby lessening the tax benefit to employees.
- Effective 1/1/2018, qualified bicycle commuting expense reimbursements are no longer tax-free to employee. This provision applies through 2025.
- Effective 1/1/2018, employers will no longer get a tax deduction for employer-paid transit and parking benefits (unless provided for an employee’s safety). However, employees can continue to pay for parking and transit benefits with pre-tax contributions and will not be taxed on these amounts. Tax-exempt employers will owe unrelated business income tax (UBIT) on the benefits provided to employees. Further clarification is needed as to whether the employer tax deduction is lost when employees pay for parking and transit benefits with pre-tax contributions since these pre-tax amounts are technically considered employer contributions. It is expected that many employers who provide these benefits will continue to do so regardless of the corporate tax implications due to mandated transit benefits in some municipalities and lower corporate tax rates beginning in 2018.
- Effective 1/1/2018, the employer deduction for athletic facilities on the employer’s premises is repealed; however,
employees can continue to exclude the value of the on-site athletic facilities from income. Tax-exempt employers will owe unrelated business income tax (UBIT) on the cost of providing this benefit.
- Effective 1/1/2018, qualified moving expense reimbursements will be taxable to employees. This provision applies through 2025. The deduction for a taxpayer’s unreimbursed moving expenses is also eliminated during this period.
- Employee achievement awards (for length of service or safety achievement presented as part of a meaningful presentation) of tangible personal property with a cost of $400 or less are excludable from an employee’s taxable income. Effective 1/1/2018, tangible person property has been defined to specifically exclude any form of cash, cash equivalents, gift cards, coupons or certificates (unless the employee is required to choose from a limited list of items pre-selected or pre-approved by the employer), vacations, meals, lodging, theater tickets, sports tickets and securities.
- Employers that offer at least two weeks of annual paid family and medical leave providing at least 50% wage replacement will be entitled to a general business tax credit for those wages paid to certain employees in 2018 and 2019. The tax credit will be available with respect to “qualifying employees” defined as employees who have been employed for at least one year and did not have compensation in excess of 60% of the compensation threshold for highly compensated employees (60% of $120,000 or $72,000 for 2018). The tax credit will vary from 12.5% to 25% of the cost of each hour of paid leave, based on the percentage of wages paid. Vacation leave, personal leave, or sick/medical leave cannot be considered family and medical leave. Leave paid for or mandated by a state or local government may not be taken into account for purposes of the credit. The employer must have a written policy that provides for the requisite amount of family and medical leave. Clarifying guidance on this tax credit would be helpful to employers.
During the tax reform debate, there was discussion of eliminating the employee income tax exclusion for other items such as dependent care assistance, education assistance and adoption assistance. However, these changes were not included in the final bill. Lastly, the tax reform law makes no changes to the employer mandate requirements of the ACA.