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New Tax Law Includes Changes for Employee Benefits - January 2018
On Dec. 22, 2017, President Donald Trump signed into law the
Tax Cuts and Jobs Act (Act). The Act makes significant changes to the federal
Internal Revenue Code (Code), including changes that impact employee benefits.
Effective for 2018:
- Employers cannot deduct expenses
associated with qualified transportation fringe benefit programs;
- Employees cannot exclude bicycle
commuting reimbursements from their gross income; and
- Qualified moving expense
reimbursements cannot be excluded from employees’ gross income.
In addition, effective for 2018 and 2019, the Act creates a
federal tax credit for employers that provide paid family and medical leave.
Because most of the Act’s provisions became effective on
Jan. 1, 2018, employers should start working with their tax advisors to
determine how the tax changes will impact their businesses.
Qualified Transportation Fringe Benefits
Code Section 132 allows employers to provide certain
transportation benefits to employees on a tax-free basis. These benefits
include qualified parking, transit passes, and transportation to and from work
in a commuter highway vehicle (“vanpooling”). Prior to 2018, bicycle commuting
reimbursements also qualified for this tax exclusion.
Qualified transportation expenses paid by either the
employer or employee can be excluded from an employee's gross income, up to
certain limits. For 2018, the tax exclusion limits are $260 per month for
qualified parking expenses and $260 per month for transit passes and vanpooling
Beginning in 2018, the Act eliminates the employer deduction
for expenses associated with a qualified transportation fringe benefit program.
The Act also eliminates the deduction for any expenses incurred in connection
with providing transportation to an employee in connection with travel between
the employee’s residence and place of employment, except as necessary for
ensuring the employee’s safety.
However, with the exception of bicycling commuting expenses,
the tax exclusion for employees has not changed—qualified transportation
benefits are still excludable from employees’ gross income. The tax exclusion
for bicycling commuting benefits is suspended for tax years beginning after
Dec. 31, 2017, and before Jan. 1, 2026.
Qualified Moving Expense Reimbursements
Before 2018, employers could pay or reimburse an employee’s
eligible moving expenses related to starting employment at a new principal place
of work on a tax-free basis. The Act suspends this income exclusion from 2018
through 2025 tax years. It also suspends the employee deduction for qualified
moving expense reimbursements for the same period of time. However, the income
exclusion and deduction still apply in the case of a member of the U.S. armed
forces on active duty who moves pursuant to a military order and incident to a
permanent change of station.
Employer Credit for Paid Family and Medical Leave
The Act creates a new temporary tax credit for employers
that provide paid family and medical leave to their employees. The tax credit,
which applies to wages paid in 2018 and 2019, is equal to a percentage of wages
paid to employees who are on family and medical leave. Paid leave that is provided
as vacation leave, personal leave, sick leave, or required by state or local
law is not taken into consideration.
To qualify for the tax credit, an employer must have a
written policy in place that provides at least two weeks of paid family and
medical leave for full-time employees (proportionally adjusted for part-time
employees) and a rate of payment that is at least 50 percent of an employee’s
normal pay rate.