How the New US Tax Reform Bills Would Affect Employers

How the New US Tax Reform Bills Would Affect Employers

Late last week, Republicans in the US Senate and House of Representatives both passed versions of a comprehensive tax reform bill whose signature feature is a hefty cut in the corporate tax rate, from 35 to 20 percent. The bill, which received no Democratic votes in either house of Congress, now goes to conference, where lawmakers from both chambers will attempt to reconcile the two bills. Significant differences still exist between the two versions, however, and the Senate bill underwent a number of hasty revisions at the last minute before being passed in the middle of Friday night. It is therefore still uncertain whether Republican lawmakers will be able to agree on an identical bill that can pass both the Senate and the House.

Both versions of the bill have major implications for employers, beyond the tax breaks for businesses. Together, the bills touch on health insurance, retirement plans, and other employee benefits, but do so in different ways. SHRM’s Government Affairs team prepared a handy chart comparing the bills’ employer implications side-by-side, while Stephen Miller gives a comprehensive rundown of the differences:

Tuition Benefits: The House bill would eliminate the employer-provided education assistance deduction under Internal Revenue Code Section 127, which allows employers to provide up to $5,250 of tax-free tuition aid to an employee per year at the undergraduate, graduate or certificate level. The Senate version does not eliminate the education assistance deduction. …

Individual Health Coverage: The Senate’s bill would effectively repeal the Affordable Care Act’s (ACA’s) individual mandate, which requires most Americans to have health insurance, by reducing to zero the tax penalty for going without coverage. The House bill leaves the individual mandate in place.…

Paid Leave Credit for Employers: Senate Republicans added an employer credit for paid family and medical leave to their bill. This proposal would allow eligible employers to claim a general business credit equal to a percentage of wages paid to qualifying employees on leave under the Family and Medical Leave Act (FMLA). A credit of 12.5 percent of the employee’s wages would increases in increments up to 25 percent of wages. To be eligible for the credit, employers must pay employees taking FMLA leave at least 50 percent of their normal wages. The House bill does not include this provision.

For employers, one of the most controversial changes proposed in the GOP’s internal debate over tax reform was a proposal to raise revenue by cutting the tax incentives currently given to employer-provided retirement savings plans like the 401(k). Although these proposals did not make it into either version of the bill, Paula Aven Gladych reports at Employee Benefit News, they could come up again in conference if the GOP’s deficit hawks insist on making the bill less expensive:

One provision that was included in the original Senate bill but was eliminated before the bill passed would have aligned the limits for employer-sponsored 401(k), 403(b) and governmental 457(b) plans. If the provision had been included in tax reform, all of these retirement plans would have a contribution limit of $18,500 in 2018, plus a $6,000 catch-up contribution for people 50 or older. … The initial idea that was discussed, but never made it into either bill, would have cut the tax-deferred contribution limit on 401(k) plans from $18,000 a year to $2,400 annually. Any deferrals over that cap would be given the Roth after-tax treatment.

Meanwhile, at Lexology, Littler Mendelson attorneys Ilyse W. Schuman and Michael J. Lotito catch another provision related to employers, more specifically to payments made in settling sexual harassment claims:

Section 13307 of the bill would add the following to section 162 of the tax code:

PAYMENTS RELATED TO SEXUAL HARASSMENT AND SEXUAL ABUSE

No deduction shall be allowed under this chapter for-

(1) any settlement or payment related to sexual harassment or sexual abuse if such settlement or payment is subject to a nondisclosure agreement, or

(2) attorney’s fees related to such a settlement or payment

In essence, an employer would be unable to deduct as a business expense the cost of the settlement of a sexual harassment claim (or the related attorneys’ fees), if the settlement has an NDA. If the provision is included in the final tax legislation, it would apply to amounts paid or costs incurred as part of a settlement after the date of the enactment.