The Impact of Tax Reform on Employee Benefits

January 2, 2018

ACTION MAY BE REQUIRED

On December 20, 2017, the U.S. House of Representatives passed the Tax Cut and Jobs Act (the “Act”) and sent the legislation to President Trump’s desk for signature. The President signed the Act into law on December 22, 2017. Although the main focus of the sweeping tax reform measure was on lowering the federal tax rates for corporations and individuals, the Act includes a number of provisions that will impact employer-sponsored benefit plans.

The following provisions are the most significant benefits-related components of the Act:

  • Individual Mandate Penalty Reduced to Zero. The Act effectively repeals the Individual Mandate by permanently reducing the penalties to zero. This change is effective January 1, 2019. According to the Congressional Budget Office, this provision would raise approximately $338 billion over a 10-year period, primarily due to fewer individuals obtaining premium tax credits for coverage purchased through the Health Insurance Marketplace. Elimination of the Individual Mandate has the potential to reduce enrollment in employer-sponsored health plans, particularly among low-income employees who may no longer feel compelled to purchase coverage to avoid a tax penalty.
  • Employer Deduction for Employee Transportation Fringe Benefits Eliminated. Beginning January 1, 2018, the employer deduction for employee transportation fringe benefits (e.g. parking and mass transit) is eliminated. However, the exclusion from income for such benefits received by an employee is preserved.
  • Exclusion from Gross Income for Qualified Bicycle Commuting Reimbursement Suspended. The Act suspends the exclusion from gross income for qualified bicycle commuting reimbursement expenses from January 1, 2018 through December 31, 2025. This means that employer reimbursements for bicycle commuting expenses will be subject to payroll taxes and income tax withholding.
  • Individual Deduction for Qualified Medical Expenses Adjusted. Currently, individuals may deduct qualified medical expenses that exceed 10% of their adjusted gross income. However, under the Act, this threshold is lowered to 7.5% for 2017 and 2018.

CONCLUSION

HCW and Gallagher will continue to monitor new developments in this area as the IRS begins to implement the Act. For more detail on the highlights referenced above, please see Gallagher’s recent Healthcare Reform Update. Should you have any additional questions, please contact our office at (919) 403-1986.