Tax Reform Proposal Nixes Favorable Tax Treatment of Several Employee Benefits

On November 3, 2017, House Ways and Means Committee Chairman Brody began the legislative consideration of Tax Reform by releasing an amendment (in the nature of a substitute) to the Tax Reform and Jobs Act (H.R. 1 hereinafter referred to as the “W&M Proposal”).  On November 9, 2017, the Ways and Means Committee completed the mark-up of the W&M Proposal and the draft will be submitted to the full House of Representatives for debate as soon as the week of November 13th.  Employers will need to monitor the progress of the W&M Proposal because this legislation contains a number of provisions that may adversely impact their employee benefit programs.  This article reviews the proposed changes to four relatively common employee benefits.

As originally proposed, Section 1404 of the W&M Proposal repealed the exclusion for dependent care assistance programs effective for the years beginning after 2017.  Under current law, Section 129 of the Internal Revenue Code of 1986 (the “Code”) excludes from gross income up to $5,000 per year ($2,500 for married filing separately) of the value of employer-provided dependent care assistance programs which “help pay for work-related expenses of caring for a child under the age of 13” (and certain spouses or other dependents).

Many employers offer these dependent care assistance benefits through their cafeteria plans (also commonly referred to as “Section 125 Plans”).  While Section 1101 of the W&M Proposal provides for increased child credits, the repeal of the income exclusion for dependent care assistance programs will more than offset the benefit of the increased child care credits.  Fortunately, on November 6, 2017, the Ways and Means Committee amended the original proposal so as to delay the repeal until the years beginning after 2022.  In any event, employers will need to monitor the W&M Proposal to determine whether and/or when they will need to amend their cafeteria plans to eliminate dependent care assistance programs.

Section 1405 of the W&M Proposal repeals the exclusion for reimbursements of qualified moving expenses effective for tax years beginning after 2017.  Under current law, Code Section 132 excludes 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 the 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.

Many employers provide for the reimbursement of moving expenses as an employee benefit to employees that relocate among the company’s offices (or to new hires).  If travel reimbursements become taxable to the recipient employee, employers may find it more difficult to relocate employees or to retain employees who need to be relocated to another of the employer’s facilities.  On November 9, 2017, the Ways and Means Committee amended this provision to preserve the “current law treatment for moving expenses in the case of a member of the armed services of the United States on active duty who moves pursuant to a military order.”

Section 1403 of the W&M Proposal repeals the exclusion for employer achievement awards effective for tax years beginning after 2017.  Under current law, Code Section 74 excludes from gross income certain employee achievement/employee length of service awards that are given in recognition of the employee’s length of service or safety achievements and that do not exceed certain amounts ($1,600 for qualified plan awards and $400 otherwise).  “A qualified plan award is an employee achievement award that is part of an established written program of the employer, which does not discriminate in favor of highly compensated employees.”

Although the requirements for a qualified employee achievement award program are burdensome enough to reduce the number of employers who offer these programs, a significant number of employers give employee achievement and/or length of service awards.  For employers who give these awards, these programs may be a significant component to their employee retention programs.  The loss of the tax exclusion will require these employers to re-evaluate the viability of their employee achievement/employee length of service award programs.

Finally, Section 1406 of the W&M Proposal repeals the exclusion for benefits from adoption assistance programs effective for years after 2017.  Please note that these programs are separate and in addition to the adoption tax credits permitted under current Code Section 23.  Under current law, Code Section 137 excludes from gross income certain qualified adoption assistance expenses paid (or reimbursed) by an employer on behalf of an employee.  Under these adoption assistance programs, qualified adoption expenses are amounts paid or expenses incurred for the adoption of a child and are limited to an amount indexed for inflation ($13,570 for 2017).

While not as broadly offered by employers as dependent care assistance programs, a significant number of employers offer adoption assistance as a part of their employee benefit programs.

Although the legislative debate of the W&M Proposal has just begun, this legislation contains a number of provisions that may impact employee benefit programs.  As such, employers will need to monitor the progress of the W&M Proposal and be prepared to modify their employee benefit programs in response to changes in the law applicable to these benefits.

About the Author

Jonathan H. Nason
Jon is a tax lawyer who advises employers on the design, implementation and administration of employee benefit plans, including ERISA and HIPAA compliance.