Tax Reform Changes for Employee Benefits
By Katharine G. Shaw
While many changes that would have affected employee benefits were discussed as a part of tax reform in 2017, only a few made it in to the final bill. In particular, they include:
- the elimination of the employer deduction for parking and transit benefits;
- the extension of the deadline for an employee to roll over a loan offset.
- Prior to tax reform, employers could deduct the cost of providing employees with “qualified transportation expenses” such as parking and transit fees. In addition, employees receiving these benefits could deduct their value, up to a monthly limit ($260 for 2018).
- Going forward, employers that pay parking or transit fees will not only lose the tax deduction for such expenses, but will also be required to include the value of the benefit in the calculation of FICA taxes (the benefits are still tax-deductible for individuals).
401(k) Loan Rollovers
- Employees who terminate employment with outstanding 401(k) loans are often forced to take an “offset” distribution of the unpaid loan balance and accrued interest. Loan offset distributions are subject to withholding tax and any applicable early withdrawal penalties unless the participant contributes, or “rolls over” an equivalent amount to an IRA or other qualified plan.
- Prior to tax reform, the deadline for loan offset rollovers was 60 days following the date of the offset. Now, participants have until the tax return due date (including extensions) for the year in which the loan offset distribution occurs.
- Companies that provide transportation benefits should evaluate the cost of these benefits in light of tax changes. Employers might consider establishing a pre-tax transportation expense plan under which each participant has an individual account from which to pay eligible expenses. The accounts may be funded though through employee pre- tax contributions, employer contributions, or a combination of both, and contributions are not subject to FICA tax.
- 401(k) sponsors should amend their plan rollover notices to account for the new loan offset rollover deadline.
If you have any questions regarding this article, please contact your Davis & Kuelthau attorney, the author noted above or our Labor and Employment practice chair linked here.