Welfare and Fringe Benefits under the Senate Version of Tax Reform
December 15, 2017
In our continued analysis of Congress’s work on tax reform, today we look at the Senate’s version of H.R.1. (Senate Bill)— with comparisons to the House version (House Bill). For our analysis on the House Bill, please see Tax Reform Takes a Cut at Welfare and Fringe Benefits. As discussed below, while there are some provisions that are consistent with the House Bill, the Senate Bill actually has provisions that would keep certain provisions consistent with current law and add other provisions that differ from both current law and the House Bill. The following is a brief summary of the key welfare and fringe benefit provisions…
• The “effective” repeal of the individual mandate under the Affordable Care Act. The Senate Bill does not technically repeal the individual mandate under the ACA, rather, it amends the penalty associated with not having coverage to zero dollars. This would be effective starting January 1, 2019.
• Dependent care assistance programs remain. The House Bill would repeal Internal Revenue Code (“Code”) Section 129 which provides employees a tax-favored method to pay for certain dependent care expenses. The Senate Bill would keep Code Section 129 as it is currently written.
• Employer-provided educational assistance programs remain. The House Bill would repeal Code Section 127, which allows employers to provide up to $5,250 of qualified educational assistance on a tax-favored basis. The Senate Bill would keep Code Section 127 as it is currently written.
• Employer-provided qualified adoption programs remain. The House Bill would repeal Code Section 137, which allows employers to provide qualified adoption expenses to employees on a tax-favored basis. The Senate Bill would keep Code Section 137 as it is currently written.
• Archer MSAs remain. The House Bill would suspend the tax-favored benefits for these accounts. The Senate Bill would keep the Code’s MSA provisions as is currently written.
• Employer-provided housing tax-favored benefits remain. The House Bill would set limits on the tax-favored benefits for employer-provided lodging. The Senate Bill would keep the status quo.
• Employer-provided child care credit remains. The House Bill would eliminate Code Sections 38 and 45F, which provide for the employer-provided child care credit. The Senate Bill would keep the status quo.
• Employee achievement awards. The House Bill would generally result in (1) taxable income for any employer-provided achievement award and (2) restrictions on the ability of an employer to deduct the cost associated with such awards. The Senate Bill would provide that an award of certain tangible personal property or an arrangement that allows the recipient to select from a limited array of tangible personal property would be deductible for the employer. However, any award of cash, cash equivalents, gift cards, gift coupons, gift certificates, vacations, meals, lodging, tickets to theater or sporting events, stocks, bonds, other securities, or other items would not be deductible.
• Repeal of employer qualified moving expense reimbursements. The Senate Bill is generally consistent with the House Bill on this item, but with one exception. Both the House and Senate would repeal the exclusion from income for qualified moving expense reimbursements under Code Section 132(g). However, the Senate Bill provides an exception for members of the Armed Forces on active duty who move pursuant to a military order. In addition, the Senate Bill changes will sunset after 2025.
• Repeal of certain tax-favored fringe benefits. The House Bill made a number of changes to fringe benefits under Code Section 132, which eliminates the tax-favored status of such benefits. The Senate Bill is generally consistent with these changes.
• Employer credit for paid family and medical leave. The Senate Bill introduces an employer credit for paid family and medical leave that was not provided in the House Bill. The proposed provisions provide a tax credit for certain employers that pay employees who are out of work on FMLA leave. To be eligible for the credit, (1) an employer must provide that at least two weeks of such leave is paid leave for a qualifying full-time employee (pro-rata for part-time employees) and (2) such pay is at least 50% of the employee’s wages. The credit would start at 12.5 percent of wages paid to those on FMLA leave and increase to a maximum of 25 percent of wages(the 12.5 percent is increased in 0.25 percent increments for each percentage point by which the rate of payment exceeds 50 percent). Note that as currently drafted, this credit would be available only in 2018 and 2019.
As we’ve stated before, with any proposed legislation, the provisions are subject to change as the legislation goes through the political process. The Senate and the House have appointed teams to work together to hammer out a final bill to present for passage and President Trump’s signature. The final bill will likely be consistent with provisions we have seen in the House Bill and/or Senate Bill, but it will take negotiations between the House and Senate to get to a final version, and the negotiation may affect employee benefit-related provisions.
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