In early November, I posted an article entitled “Tax Reform Proposal Nixes Favorable Tax Treatment of Several Employee Benefits”. That article reviewed the Ways and Means Committee’s proposal (H.R. 1, the Tax Reform and Jobs Act; hereinafter referred to as the “Committee Proposal”) which repealed the income tax exclusions for (1) dependent care assistance programs; (2) the reimbursement of qualified moving expenses; (3) employee achievement awards; and (4) adoption assistance programs.
Further, while not mentioned in that article, the Committee Proposal also repealed the income exclusion for educational assistance programs (i.e., up to $5,250 annually of educational assistance provided by an employer to an employee). With President Trump’s signature on the Tax Cuts and Jobs Act (hereinafter referred to as the “Tax Act”), this article provides an updated review of the tax treatment of these employee benefits.
The Committee Proposal would adversely impact the employee benefit programs of numerous employers. As a result, a number of employers lobbied Congress and were successful in obtaining substantial changes to the Committee Proposal. Significantly, the Tax Act does not repeal the income exclusions for: (1) dependent care assistance programs; (2) adoption assistance programs; and (3) educational assistance programs. Further, as described below, the Tax Act’s changes to employee achievement awards are not significant. Thus, the Tax Act should have a minor impact on most employer’s employee benefit programs.
As described in the prior article, Section 74 of the Internal Revenue Code (the “Code”) excludes from gross income certain employee achievement/employee length of service awards that are given in recognition of the employees’ length of service or safety achievements and that do not exceed certain amounts ($1,600 for qualified plan awards and $400 otherwise). Under Code Section 74, employee achievement awards had to be given in the form of “tangible personal property”. Applicable Internal Revenue Service (the “IRS”) guidance provided that “tangible personal property” does not include cash, gift certificates, vacations, meals, lodging, tickets to theatre and sporting events, stocks, bonds and other securities.
The Committee Proposal repealed the exclusion for employee achievement awards effective for tax years beginning after 2017. The Tax Act retains employee achievement awards, but clarifies these programs by defining “tangible personal property”. Generally, the Tax Act defines “tangible personal property” by exclusion and the Tax Act’s list of excluded items are items from the IRS guidance that are listed in the preceding paragraph.
In other words, the Tax Act’s change to the employee achievement award programs is to insert the existing IRS guidance on items that are excluded from “tangible personal property” into the Code. Thus, the Tax Act should have a minimal impact on employers’ employee achievement award programs.
Unfortunately, employers were not entirely successful in getting Congress to eliminate all of the adverse employee benefit provisions in the Committee Proposal. As described below, the Tax Act includes the repeal of the income tax exclusion of qualified moving expenses.
As described in the previous article, prior to amendment by the Tax Act, Code Section 132 excluded from gross income the reimbursement to an employee by an employer of qualified moving expenses under Code Section 217. Subject to certain additional requirements, qualified moving expenses are reasonable expenses of moving household goods and personal effects from a former residence to a new residence (including lodging, but excluding meal expenses) in connection with a move to the taxpayer’s new principal place of work that is at least 50 miles from the former principal place of work.
The Committee Proposal repealed the income exclusion for the reimbursement of qualified moving expenses effective for tax years beginning after 2017 (except for the moving expenses of a member of the armed services of the United States on active duty who moves pursuant to military orders). Rather than a permanent repeal of the income exclusion, the Tax Act suspends this exclusion (as modified for armed services moving expenses, described above) for the period of January 1, 2018 through December 31, 2025.
The suspension of the moving expense reimbursement exclusion will be a factor that employers may need to consider in connection with employee relocations. I expect that many employers will be less likely to relocate substantial numbers of employees. In addition, I expect that some employers will elect to “gross-up” moving expense reimbursements by the expected tax liability.
While outside the scope of this article, the Tax Act makes a couple of changes to retirement arrangements. These changes include (1) the repeal of the rule allowing the recharacterization of Individual Retirement Account contributions from pre-tax to Roth and vice versa; (2) an extension to the rollover period for the rollover of plan loan offset amounts; and (3) an increase in the amount of length of service award contributions that may be made on behalf of certain public safety volunteers.
In summary, the Tax Act has a relatively minor impact on the employer benefit programs for most employers. However, due to the repeal of the income exclusion for qualified moving expense reimbursements, employers may need to give some consideration as to how to compensate employees for the costs associated with employee relocations.