The House tax reform bill includes a number of changes to the tax treatment of employee benefit programs, including the repeal of exclusions, deductions and credits for certain employee benefits and changes to rules for qualified retirement plans. These provisions are effective for tax years beginning after 2017.
Repeal of Exclusions, Deductions and Credits for Employee Benefits
- Entertainment Expenses and Fringe Benefits – The bill repeals deductions for expenses relating to entertainment, amusement and recreation activities and facilities (including membership dues and on-premises gyms) and certain fringe benefits (e.g., employee discounts, transportation fringe benefits), unless the benefits are treated as taxable compensation to the employee. Employers may continue to deduct 50% of expenses relating to food, beverages and qualifying business meals.
- Moving Expenses – Qualified moving expenses are no longer deductible by an employee or, if paid or reimbursed by the employer, are no longer excludible from the employee’s income.
- Education Assistance – The bill repeals the exclusion for employer-provided education assistance.
- Dependent Care – The bill repeals the exclusion for employer-provided dependent care assistance and the employer credit for qualified child care expenses.
- Employee Achievement Awards – Qualified length of service and safety achievement awards are no longer excludible from employees’ income.
- Adoption Assistance Programs – The bill repeals the exclusion for expenses paid by an employer under a qualified adoption assistance program.
- In-Service Distributions – The bill allows defined benefit plans (and also state and local government defined contribution plans) to make in-service distributions to employees beginning at age 59½ rather than 62. This change aligns with the in-service distribution age under 401(k) plans.
- Hardship Distributions – Under current law, a 401(k) participant who takes a hardship distribution cannot make contributions to the plan for six months. In addition, a hardship distribution is limited to the amount contributed by the participant and excludes earnings and employer contributions. The bill allows participants who take hardship distributions to continue making contributions to the plan, and allows employers to permit hardship distributions to include earnings and employer contributions.
- 401(k) Loan Rollover Period – Under current law, if a 401(k) loan comes due early on plan termination or termination of employment, the employee has 60 days to contribute the loan balance to an individual retirement account (IRA) to avoid a 10% penalty for early withdrawal. The bill extends the deadline to contribute the balance to an IRA to the due date for filing the employee’s tax return for that year.
- No Changes to Limits on 401(k) Contributions – Before the bill was released, some reports indicated that it was expected to reduce the limits on pre-tax contributions to 401(k) plans. The bill does not include any changes to the limits ($18,500 in 2018, for employees under age 50).