What: The Tax Cuts and Job Act (the "Act") makes significant changes to the Affordable Care Act's individual mandate. The Act also makes other changes to tax rules that may impact employer-sponsored benefit offerings.
When: President Trump signed the Act into law today. Changes to the individual mandate will take effect in 2019. The effective date of many other provisions in the Act are slated to take effect in 2018 and others may be delayed even further.
Who: While the main purpose of the Act is to reform U.S. tax law, the Act does contain provisions that will impact the insurance industry and employer-sponsored benefits. This update is intended to provide a high-level summary of these provisions.
(NOTE: This update is not intended to address all tax implications imposed on employers by the Act, including provisions that address tax-exempt organizations, executive compensation, payroll taxes, and other tax rules that may apply to an employer and its business operations. SIG is not a tax advisor and is prohibited from providing tax advice. Employers are urged to consult with their accountant, tax advisor or legal counsel for direct guidance regarding how this new tax law impacts their business and tax liability.)
The final vote on the Tax Cuts and Job Act was made on December 20, 2017, by the U.S. House of Representatives, moving the Act to the final stages of the law-making process. With the President's support and pending signature, the Act will soon become law and employers will have to consider how the new law impacts their business and benefit offerings and may be required to implement new measures to comply with the law.
The full summary of the law has been made available under the Joint Explanatory Statement of the Committee of Conference.
The below chart notes some items impacted by the new tax law. Additional information is provided below.
The Tax Cuts and Job Act DOES:
The Tax Cuts and Job Act DOES NOT:
The new tax law removes the tax penalty under the Affordable Care Act's (ACA's) individual mandate provision:
Under the ACA, individuals who go without health coverage for a certain period of time (and who are not otherwise exempt from the provision) are required to pay a tax penalty. This penalty will be reduced to zero ("0") beginning in 2019, essentially repealing this part of the ACA.
It is important to note the following:
- The individual mandate is still effective for the 2017 and 2018 tax years. Individuals who are not exempt and have lapses in coverage beyond the time permitted under the ACA will still have to pay a tax penalty for 2017 and 2018. For more on the individual mandate, please see the healthcare.gov webpage. The IRS also has a webpage on this requirement.
- The new tax law does NOT repeal the employer mandate. Applicable large employers (ALEs), as defined under the ACA, are still subject to the employer shared responsibility mandate ("pay or play"). Prior efforts of the Trump Administration to repeal or replace the ACA and the employer mandate were unsuccessful, so these requirements continue to apply and have not changed under new tax law.
Generally, under the employer mandate, ALEs who do not offer health coverage that meets ACA requirements to full-time employees and their dependent children will have to pay a penalty if a full-time employee receives a premium tax credit from the federal Marketplace. See the IRS webpage for more information on the employer mandate.
- The new tax law does not repeal IRS information reporting requirements. ALEs and providers of minimum essential coverage (MEC) must continue to comply with the IRS information reporting requirements. Click here for more information on reporting requirements.
- The new tax law does not change the way employer-provided health coverage is taxed. The new law does not tax the value of employer-provided health care.
There will be no changes to tax-favored health savings accounts (HSAs) or flexible spending accounts (FSAs) under the new tax law. - The Act does not make changes to the limits on health savings accounts or dependent care/medical flexible spending accounts (FSAs). Also, the tax favorability status of these plans has been preserved under the final bill. (It was previously proposed that these plans would no longer qualify for income and wage exclusions.)
A paid leave tax credit is available for 2 years for certain qualifying employers, beginning in 2018 and ending before 2020. - Employers that offer paid leave for employees under the Family Medical Leave Act may claim a new tax credit starting with the 2018 tax year. Generally, to qualify for the tax credit, employers must:
- Provide a monetary benefit of at least 50% of the employee's regular earnings during the leave
- Provide at least a 2-week leave
- Must offer the leave benefits to both part-time and full-time employees that meet certain requirements
The tax credit will range between 12.5% and 25% of the cost of each hour of paid leave and will depend on the percent of regular earnings the leave program provides to employees. The credit may only be taken for employees who earn less than $72,000.
The employer tax deduction for commuter benefits is eliminated - The new tax law removes the tax deduction employers may currently take for mass transit and parking benefits, with the exception of what is needed to ensure employee safety. These items continue to be tax-exempt for employees who pay their own parking and transit expenses. This new rule takes effect in 2018.
Also under the new law, employer reimbursements for bicycle commuter expenses are taxable and subject to income tax and withholding. Provisions in the Act suspend the prior exclusion of these benefits from income and wages (for qualified expenses) for the tax years beginning in 2018 and ending before January 1, 2026.
Other fringe benefits, such as employer-paid moving expenses, and meals are also affected - The business deduction and income exclusion applicable to taxable income for employer-paid moving expenses are suspended for 7 years, beginning in 2018 and ending in 2025. (A general exception applies to certain individuals in the military and their families.)
Currently, employers may deduct up to 50% of employee meals expenses. Employers may no longer deduct these meal expenses under the new law. Also, current tax law allows employers to deduct all de minimus expenses related to operating eating facilities, such as an onsite cafeteria. The new law expands the 50% limit to de minimus fringe benefits to apply until the end of 2025, after which this tax incentive will no longer apply.
The tax treatment of other fringe benefits, such as employer-paid adoption assistance, employer provided childcare, and employer-provided housing has remained unchanged.
SIG will continue to provide information and guidance as it becomes available. If you have questions about the information in this update, please contact your SIG representatives.