The Republican tax bill was introduced last Thursday by the House of Representatives. The proposed bill has mixed-results for HR programs, although 401(k) programs are relatively untouched.
The 401(k) rules were modified in part. First, contributions are not impacted negatively. 401(k) contributions will increase an additional $500 in 2018 to $18,500 and catch-up contributions for those 50 or older by end of calendar year will be $6,000.
Second, the hardship withdrawal waiting period for new contributions would be eliminated. Currently the waiting period is six months. Two issues arise by the waiting period. To begin with, the employee is penalized by not allowing them to continue their savings into the plan. Then, employees, unless notified by someone, many times forget to reinstate their contributions after the six months. This change will solve the hardship withdrawal issues.
Third, hardship withdrawals are currently limited to a percent of what the employee contributed, not the employer’s contribution or asset appreciation. The tax bill proposes allowing employees to take a withdrawal based on the whole balance. Therefore, if a real emergency arises, there is more cash available for the hardship withdrawal.
Next, employees who currently have an outstanding loan from the 401(k) and either leave or lose their job, will have to roll the outstanding balance into an IRA or new employer's plan within 60 days. Otherwise it becomes a taxable event and is subject to a 10% penalty. Under the proposed bill, an employee in this situation would have until April 15th to repay it into an IRA or new employer’s plan.
In addition, the proposed bill would sync the age for withdrawals from 401(k) or 403(b) to 59 ½ years old without penalty. Currently, some plans, mainly government plans, have 62 ½ as the age for penalty free withdrawals.
Finally, the proposed bill allows employers who have defined benefit plans that are closed to new participants to roll into defined contribution plans for discrimination testing. The current rules for defined benefit plans are very complex for testing purposes. The proposed bill would allow the defined benefit plans to continue growing benefits.
Now for some of the bad news. First, employee achievement awards would be taxed as income. Per the IRS, tangible personal-property awards given to employees for safety or length-of-service achievements are not taxable if the award is a tangible item like a plaque, watch, ring, or pen. The amount of the exclusion is $1,600 or $400 depending on whether is it a qualified plan or not. The exclusion does not apply to awards of cash, cash equivalents, gift certificates, or other intangible property such as vacations, meals, lodging, tickets to theater, or sporting events. Under the proposed bill, anything given to the employee would be taxable as income.
Further, the exclusion for employer-provided housing would be limited to $50,000 and would phase out for those earning $120,000 or more under the new bill. Currently, full or partial exceptions apply if the housing is provided for the convenience of the employer, a temporary work location, or lodging furnished by an educational institution. If no exception applies, it is fully taxable. Also, for relocation programs, employer provided moving expense reimbursements would no longer be tax free.
Another area hit by the new bill is Dependent Care Flexible Spending Accounts. The Dependent Care FSA provides employees the opportunity to have funds deducted on a pre-tax basis for dependent care expenses for your eligible dependents including children and aging parents. The combined employer/employee contribution amount is $5,000. The proposed tax bill eliminates this benefit completely.
Also, education assistance of up to $5,250 of graduate and undergraduate education costs that are not related to the employee's current job are tax free. The proposed bill eliminates this benefit unless the education is related only to the employee's current job. Young employees who work for an employer to access these benefits may think twice about the job. Also, education loan deductions and credits are eliminated under the bill.
Finally, any other fringe benefit that is "primarily personal" in nature, namely, athletic facilities, transportation fringe benefits, or amenities that involve property or services not directly related to the employer's trade or business are not deductible by the employer except to the amounts included in the employee’s taxable wages. For example, membership to a gym is not deductible unless the amount of the membership is included in the taxable employee income.
In the same vein, a business will lose the deduction of expenses relating to entertainment, amusement, recreation activities, or facilities (think corporate boxes at Tiger games). Currently it is at the 50% level. However, the 50% limitation would be maintained under the proposed bill for food or beverages expenses and to qualifying business meals.
There are a few more changes that are not included above, such as the impact of deferred compensation and executive compensation deduction. But the point is made that the current bill’s impact of these changes is to increase the amount of the employees’ and employers’ taxable base and possibly overtime base. Therefore, the proposed bill impacts HR in a variety of ways, and if passed as it is, grossing up may not be a reasonable solution. This new environment would require HR and finance to be very creative to compete and retain employees without driving up the costs of employment.
Sources: Bankrate 11/6/17, EY 11/6/17, Chicago Tribune 11/3/17, MossAdams 10/14, IRS Publication 15-B Employers Guide to Fringe Benefits