Massive Tax Reform Legislation Will Have Drastic Impact on Employers

Author: Rena Pirsos, XpertHR Legal Editor

UPDATE: On December 22, 2017, President Trump signed the tax reform bill into law.

December 4, 2017

On Saturday, while many Americans were busy with the holiday season hustle and bustle, the Senate moved quickly to pass its version of historic, sweeping tax reform legislation known as the Tax Cuts and Jobs Act (H.R. 1), by a 51 to 49 vote along party lines. The massive, 500-page bill that is ironically touted as simplifying the US tax code, will have a drastic effect on the employment tax treatment of many core employee benefits starting January 1, 2018.

The Senate bill also repeals the individual mandate provision of the Obama Administration's Affordable Care Act (ACA). The controversial ACA provision requires all Americans to purchase health insurance or pay a penalty.

Employers should begin preparing for the extensive changes now, even though the bill still has some hurdles to clear, as Congress is intent on wrapping it up before the end of this year. The House and Senate must now work to resolve differences in their respective versions of the bill in Conference Committee. If both houses of Congress reach a compromise and pass it without further amendments, the bill will move to President Trump's desk for his signature into law. Trump is eager to sign it.

The following is a breakdown of the key employment related changes. Some minor amendments may still be made in the reconciliation process before a final bill becomes law.

Income Tax Withholding

Both the House and Senate versions of the bill would change the current personal income tax rate structure, which is composed of seven brackets - 10%, 15%, 25%, 28%, 33%, 35% and 39.6%.

The House bill consolidates the current seven brackets into five - 10%, 25%, 35%, 39.6% and 0% in the form of an enhanced standard deduction. The Senate version revises the seven brackets to 10%, 12%, 22%, 24%, 32%, 35% and 38.5%, and repeals these changes after December 31, 2025.

While the House bill would retain the 39.6% flat rate of withholding on supplemental wages (e.g., bonuses, severance pay) over $1 million, the Senate version would reduce it to 38.5% and also reduce the current 25% rate on supplemental wages up to $1 million to 22%.

In addition, both the House and Senate versions of the bill would substantially increase the standard deduction for all categories of filers to a similar extent and completely repeal the personal exemption.

Fringe Benefits

Both bills include major changes to income tax withholding exclusions for many common employer-provided fringe benefits. For many of these benefits, however, where one version of the bill makes changes, the other version does not. The reconciliation process aims to iron out these differences.

For example, the House bill eliminates or caps the exclusion from either some or all federal employment taxes (i.e., federal income, Social Security and Medicare, and unemployment insurance taxes), up to applicable dollar amounts, for benefits such as:

  • Adoption assistance;
  • Dependent care assistance;
  • Educational assistance (non-job related);
  • Employee achievement awards;
  • Housing assistance;
  • Medical savings accounts (the HSA rollover provision would remain); and
  • Moving expenses.

Under the House bill, employees would no longer be able to take advantage of them on a pretax basis. The benefits would become fully taxable to employees.

On the other hand, the Senate bill would:

  • Eliminate the exclusion for moving expenses, except for certain members of the Armed Forces;
  • Permit certain employee awards (e.g., cash, cash equivalents and gift cards) to be claimed as a business deduction for non-tangible personal property; and
  • Eliminate the income exclusion for qualified bicycle commuting expenses of up to $20 per month during which the employee regularly uses the bicycle for a substantial portion of travel between home and work.

Stocks and Stock Options

Under a new § 83(i) of the Internal Revenue Code, both the House and Senate versions of the bill would permit private company stock options to be deferred from inclusion in federal income taxable wages subject to withholding and create new employer reporting requirements. In addition, restricted stock options would not be eligible for the current § 83(b) election.

EITC Quarterly Wage Reporting

The House bill would require employers to complete and file a quarterly report of each employee's wages to prevent fraudulent employee claims for the Earned Income Tax Credit (EITC).

Qualified Retirement Plans

The House version of the bill also makes changes to the provision affecting qualified (i.e., tax-favored) retirement plans, including the age for in-service distributions, hardship distributions and withdrawals and the nondiscrimination rules. Both the House and Senate versions of the bill make changes affecting plan loan offsets.

Business Expense Deductions and Credits

An employer would no longer be able to take a business expense deduction for the cost of providing certain fringe benefits (e.g., athletic and eating facilities, entertainment expenses and certain transportation fringe benefits) to employees under certain circumstances under both versions of the bill. There are differences between the two bills.

Executive compensation related business deduction limits (e.g., for certain commissions and performance-based compensation) are also affected by both versions.

In addition, certain business tax credits (e.g., Work Opportunity Tax Credit, employer-provided childcare credit, credit for Social Security taxes on tips, credit for paid leave for employees on Family and Medical Leave Act leave) are either eliminated or otherwise affected by either version of the two bills.