Update: How the new tax law will impact HR
January 3, 2018
By Anthony Kaylin, courtesy of SBAM Approved Partner ASE
Now that the tax law was passed and signed by President Trump, it has many implications for HR. The new law has mixed-results for HR programs.
No changes to the paychecks will be felt by employees until the IRS issues new withholding tables sometime this month (January). Until that point in time, employees will not see any changes to their paychecks. All employees will likely have to complete new Federal W-4s in 2018. The tax bill eliminates exemptions – the personal allowances for employees and their spouses and children. Payroll administrators should expect the government to issue a new W-4 form, with new instructions, after the updated withholding tables are released. The changes in federal withholding will not impact payroll taxes such as Social Security and Medicare.
After the federal changes come through, states may have to update their W-4s as necessary. Most states will still be keeping personal exemptions, so withholding on the state level will likely not change.
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. In addition, there were no changes to hardship withdrawals, and the waiting period is still six months.
The new law also provides that following a plan termination or severance from service, participants can rollover a qualified plan loan offset amount to an eligible retirement plan by the due date (including extensions) of the participant’s federal income tax return for the year in which the offset occurs, thereby avoiding taxation on the offset amount.
Third, hardship withdrawals are currently limited to a percent of what the employee contributed, not the employer’s contribution or asset appreciation. Although the House bill proposed allowing employees to take a withdrawal based on the whole balance, the tax law made no changes to the current hardship rule.
The law did not change and 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.
Paid Sick Leave
The new law promotes paid sick leave by providing a credit to employers for paid family and medical leave. The provision allows eligible employers to claim a general business credit equal to 12.5% of the amount of wages paid to qualifying employees during any period in which such employees are on family and medical leave if the rate of payment under the program is 50% of the wages normally paid to an employee. The credit is increased by 0.25 percentage points (but not above 2%) for each percentage point by which the rate of payment exceeds 50%. The provision is effective for wages paid in taxable years beginning after December 31, 2017, and would not apply to wages paid in taxable years beginning after December 31, 2019.
Repeal of Deduction for Sexual Harassment Settlements Coupled with Non-Disclosure Agreement
Under the new tax law, no deduction is allowed for any settlement, payout, or attorney fees related to sexual harassment or sexual abuse if such payments are subject to a nondisclosure agreement. Under previous law it was considered a deductible expense.
The new tax law also expands the use of 529 College savings plans to K-12 education by allowing withdrawals for public, private or religious schools. Home schooling families are also allowed to use 529 funds towards educational expenses. The limit of withdrawals is $10,000 per year, per child.
Qualified Transportation Benefits
Under the new law, employers can no longer deduct expenses for qualified transportation fringe benefits. This provision is effective for tax years beginning after December 31, 2017. In addition, qualified bicycle commuting expenses will no longer be tax exempt to employers, effective for tax years beginning after December 31, 2017. However, other qualified transportation fringe benefits, such as parking and transit passes, will continue to be tax exempt to employees, so that plans that offer salary reductions for such benefits will continue to be allowed. However, given that employers will no longer be able to deduct the costs of those benefits, there may be less incentive to sponsor them, according to the Employer Council on Flexible Compensation.
Non-cash awards for length-of-service or safety achievement may be provided to employees tax-free if the employer has a qualified plan. Qualified plans must be written and can’t discriminate in favor of upper management. The maximum that can be excluded from employees’ income is $1,600; the average cost of all awards per year can’t exceed $400; presentations to employees must be part of a meaningful ceremony; length-of-service awards can only be given in five-year increments, beginning with the fifth year; and safety achievement awards are limited to 10% of eligible employees a year and can’t be given to management. If the employer does not have a qualified plan, only up to $400 from employees’ income may be excluded.
No employer deduction is allowed for expenses paid or incurred after 2017 with respect to (1) an activity generally considered to be entertainment, amusement or recreation, (2) membership dues with respect to any club organized for business, pleasure, recreation or other social purposes, or (3) a facility or portion thereof used in connection with any of the above items. Employers may still generally deduct 50% of food and beverage expenses associated with operating their trade or business (e.g., meals consumed by employees on work travel).
For those employers with mobility programs, qualified moving expense reimbursements provided by an employer to an employee are now includable in the employee’s income (except in the case of a member of the Armed Forces of the U.S. on active duty, who moves pursuant to a military order).
Employer Provided Housing
The new tax law did not change employer provided housing rules. Under the proposed House bill, the exclusion for employer-provided housing would have been limited to $50,000 and would phase out for those earning $120,000 or more.
Education Assistance Programs
The House bill would have allowed educational assistance programs to be tax free as long as the employee took classes specific to the job. The new tax law maintained the current law with no changes.
Dependent Care Assistance Program
Although the House wanted to eliminate Dependent Care Flexible Spending Accounts, the new tax law maintained it with no changes.
Adoption Assistance Program
The House wanted to eliminate the adoption assistance program. The new tax law maintained it with no changes.
Excise Tax on Tax Exempt Employer Compensation
Beginning 2018, a new tax is imposed on excess compensation paid by a tax exempt employer: Tax equals 21% of compensation paid to a covered employee over $1,000,000, plus excess parachute payments. The employer is liable for the tax. Covered employees are the five highest compensated employees; once an employee becomes a covered employee after 2016, he or she stays one.
The excise tax will not apply to any excess compensation or parachute payments paid to a licensed medical professional (including a doctor, nurse or veterinarian) directly related to the performance of medical or veterinarian services, and payments made to an individual who is considered non-highly compensated for purposes of tax-qualified retirement plans will not be subject to excise tax for the payment of excess parachute payments.
Although there are more code changes, for example, executive compensation for public companies, the above hits the major areas of concern for HR. This new law requires much for HR and accounting to review and analyze regarding its impact.