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How the New Tax Law Affects Employee Benefits



 

Everyone is scrambling to figure out what the new federal tax law means, and that includes HR and benefits managers. Even the Internal Revenue Service has been working overtime to create and distribute updated payroll withholding tables. For now, employers are allowed to use previous charts during what the IRS describes as a “transition and testing” period.

Nonetheless, businesses must quickly get up to speed on the details, to ensure they remain in compliance with the new laws. And, understandably, employees want to know if and how they will be affected. The news has focused on the prospect of increased employee salaries and bonuses that could be forthcoming, thanks to projected corporate tax savings.

But what about employee benefits? With all the focus on salaries, many may not have even considered the new law’s other possible personal ramifications.

The new tax law is, in fact, a compendium of changes

There are a number of elements significant for employers as well as their workers. For example, employers can now capture a tax credit when you pay an employee who takes advantage of the Family and Medical Leave Act. That starts this tax year. You will earn 12.5% if you pay them at least half their regular wages, 25% if you pay them their entire regular wages. You’ll get no credit for payments less than half their wages.

That could benefit employees if the tax credit motivates you to pay them more when they are on FMLA leave. However, there are several provisions within the Tax Cut and Jobs Act that directly affect employee benefits:

  • You may no longer provide subsidies that encourage employees to use public transit or cover the cost of their parking, and of course that means your associated business tax deduction is gone. If employees want to use pre-tax dollars to pay for these expenses, they can do that. In many cities where businesses partner with government to encourage workers to use congestion-reducing means of transportation, this tax law change could have a detrimental effect.
  • You may continue to reward employees with achievement awards, but the business tax exemption for these gifts is gone. That includes rewards such as cash and cash equivalents and gift cards as well as meals, lodging, vacations and more. You can still create a pre-approved list of incentives from which employees can choose their award.
  • Moving-related tax deductions are gone, as of this year and continuing through 2025. It doesn’t matter who pays, there is no tax benefit.
  • Employee meal deductions are going away. After tax year 2025, the 50% tax benefit companies now enjoy for providing on-site meals through a cafeteria-type facility will no longer be available. There are also provisions that eliminate business entertainment deductions, although your company will still see a tax benefit for client dinner expenses that are not considered “entertainment.” And you can certainly continue to provide an on-site meal facility as an employee benefit, simply without the tax savings. Employees will still be able to deduct that benefit amount from their taxable income.

Not everything has changed

As always happens when new laws are enacted, some proposed elements never make the final cut. In the case of the new Tax Cuts and Jobs Act, Congress considered a number of prospective changes that they ultimately decided to leave untouched. So no there are no tax changes when it comes to:

  • Tuition assistance provided by employers
  • Pre-tax status of flexible spending accounts used for dependent-care
  • Adoption assistance tax deduction
  • Employer-provided child care facilities benefit
  • Minimum age to participate in a defined benefit program

It’s not only the feds who are enacting new laws

The ultimate employee benefit – salary — may not have been directly affected by new federal tax law, but states are on the move when it comes to this touchy subject. Employers need to beware. States and some cities are targeting the practice of asking job applicants about their pay history. California, Delaware, Massachusetts, Oregon, New York City, and Philadelphia all have new laws that restrict this.

Why? The goal is to protect the rights of women and minority workers, who have historically been paid lower wages than white men. Legislators believe that the ability to learn an applicant’s previous levels of pay makes it easier to perpetuate the disparity by offering a lower salary for the new position.  Conversely, they say that not knowing past salary information will keep employers “honest” and make them more competitive by essentially forcing them to offer quality (and equal) wages.

And then there’s health care reform

The newly-passed tax law does not specifically eliminate the individual health insurance requirement mandated by the Affordable Care Act, but it does effectively sideline it. Nonetheless, qualified large employers still have to meet ACA coverage guidelines.

However, there’s more to the health care reform picture than that, and every human resources and benefits professional knows this is an evolving situation. That makes it hard to keep up, yet more important than ever to try, because health care is a major component of most benefits packages.

Aside from the new federal tax law, the President issued an executive order on health reform last fall. The order didn’t overtly make changes, but it did require staff at the Department of Labor, the Department of Health and Human Services, and the Treasury Department to contemplate new rules that would:

  • Allow the sale of low-cost, short-term health insurance that would provide coverage up to 364 days rather than the current 3-month limit
  • Increase use of health reimbursement accounts, by encouraging a larger percentage of employees to take advantage of HRAs, using these tax-free funds to purchase their own individual insurance
  • Remove some limitations on association health plans such that more employers could form groups to purchase health insurance

Despite the fact that the Department of Labor supposedly had 60 days to respond to the President’s order regarding association health plans, it could take months, or even longer, for these agencies to come up with proposed changes. Industry watchers predict we won’t see any formal effects from this order until perhaps some time next year.

What will you do next?

How your company responds to the provisions in the new Tax Cut and Jobs Act could have lasting implications beyond the tax-specific effects. If valued benefits go away due to these tax changes, will you replace them? With what? You cannot simply explain to employees that “it’s not our fault.” They count on their benefits and understand those benefits constitute part of their personal compensation.

The bottom line is that benefits packages are a critical asset for employers these days. They are often deal-makers – or deal-breakers – when it comes to recruiting, hiring, and retention. That means employers must stay vigilant, looking to understand and comply with each change as it comes along but also looking for more innovative ways to reward employees with benefits that support long-term loyalty.

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