The Tax Cuts and Jobs Act (TCJA) of 2017, which received final approval from both houses of Congress on December 20 and was signed into law two days later, is the first sweeping overhaul of the tax code in more than three decades. In addition to reforming the marginal rate structure and deductions for individuals, slashing the top corporate tax rate from 35% to 21%, creating a new 20% deduction for pass-through businesses, and zeroing out the Affordable Care Act individual mandate penalty starting in 2019, the law includes a number of provisions that specifically affect executive compensation and employee benefits.
The new law makes a number of changes to executive compensation rules. Under Section 162(m) of the Internal Revenue Code, the deductibility for publicly traded companies of compensation paid to the CEO and the other three highest compensated officers other than the CFO was limited to $1 million annually, but this limit did not apply to performance-based compensation, including stock options and commissions. Starting in 2018, the exemption for commission- and performance-based compensation is removed, and the covered group of employees is expanded to include the CEO and the CFO, as well as the three other highest-compensated officers.
The TCJA also changes the rules for qualified equity grants to employees. Under prior law, a qualified employee was generally required to include stock-based compensation in his or her income in the year in which the employer transferred the stock to the employee, or in which there was no longer a substantial risk of forfeiture, regardless of whether the stock was tradable on an established securities market. Starting in 2018, the TCJA allows private companies to give employees the opportunity to defer taxation for up to five years on income attributable to stock received following a stock option exercise or settlement of a restricted stock unit if the stock is not tradable on an established securities market.
In addition, the legislation eliminated or restricted several employer deductions for employee expenses. Whereas under prior law, employers could provide moving reimbursements on a tax-free basis to employees; under the new law, the tax deduction for moving reimbursements is suspended through 2025 for most employees. Moreover, beginning in 2018, the TCJA repeals the business deduction for the cost of providing employees with parking or transit passes (worth up to $255 per month per employee in 2017), except as necessary for ensuring the safety of the employee. However, employees are still permitted to pay for their own mass transit or workplace parking passes using pretax income through an employer-sponsored salary deduction program. The qualified bicycle commuting reimbursement, which allows employees to exclude from their income qualified bicycle commuting reimbursements of up to $20 per qualifying bicycle commuting month, is suspended through 2025.
Under prior law, employee achievement awards for length of service or safety achievements could be excluded from an employee’s income if certain conditions were met. Under the TCJA, such awards are deductible only if they qualify as tangible personal property starting in 2018. Thus, in most cases the deduction will no longer be available for awards in the form of cash, gift coupons or certificates, vacations, tickets to sporting or theater events, or similar items.
The TCJA also allows employers to claim a new Federal tax credit of between 12.5% and 25% for wages paid to employees who are taking leave under the Family and Medical Leave Act (FMLA). To be eligible for the credit, employers must pay employees on leave at least 50% of their regular earnings, and must provide paid leave to all qualifying full-time and part-time employees. However, this credit is available for 2018 and 2019 only.
In addition, the TCJA includes some modifications to the rules on qualified retirement plans. Under the new law, a traditional IRA that has been converted to a Roth IRA cannot be converted back to a traditional IRA. The legislation also extends the rollover period for defined contribution plan loan offset amounts that result from separation from employment by permitting these rollovers to occur as late as the due date for filing the employee’s tax return for the year of separation.
From Benefit Trends Newsletter, Volume 61, Issue 1
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