Final tax reform bill employee compensation and benefits provisions

Transcription

1 Final tax reform bill employee compensation and benefits provisions Congress has now finalized the Tax Cuts and Jobs Act (H.R. 1). This document summarizes the compensation and benefits provisions that appear in the final bill. Certain compensation and benefits provisions that were included in earlier versions of the bill are not included in the final version. These provisions include the following: Inclusion in an employee s income of tuition reduction provided by an educational organization to the employee, spouse and dependents Inclusion in an employee s income of educational assistance payments made by the employer of up to $5,250 per year Inclusion in an employee s income of adoption assistance provided by the employer Various changes to qualified retirement plan rules, such as lowering the permissible age for in-service distributions and making larger amounts available for hardship distributions Repeal of the employer-provided child care credit Repeal of the work opportunity tax credit The following table summarizes the compensation and benefits provisions in the final bill. Inclusion in an employee s income of employerprovided housing for amounts over $50,000 Inclusion in an employee s income of dependent care assistance funded by an employer or by an employee through a dependent care flexible spending arrangement

2 Compensation and benefits provisions Topic current law Tax Cuts and Jobs Act (H.R. 1) IRC sections 162(m) $1 million compensation deduction limit Section 162(m) limits a public company s tax deduction to $1 million per covered employee per taxable year. The term covered employee includes the CEO and three highest paid officers other than the CEO and CFO as of the last day of the taxable year (the CFO is excluded). For purposes of the limit, the definition of compensation excludes commissions and qualified performancebased compensation. Qualified equity grants an employee who holds a nonstatutory stock option or a restricted stock unit (RSU) recognizes compensation income when the underlying stock is transferred to him or her. Executive compensation for profit entities The bill expands the definition of covered employee to include any individual who served as the CEO or CFO at any time during the calendar year and the next three highest paid officers. Any officer who is a covered employee in taxable years beginning after Dec. 31, 2016 is a covered employee for all future years, including years after the employee terminates employment or dies. As a result, the $1 million limit applies to compensation paid to the covered employee or a beneficiary after termination of employment or death. In addition, the bill repeals the exclusion of commissions and qualified performancebased compensation from the $1 million deduction limit. As a result, the $1 million limit applies to all of a covered employee s compensation (with limited exceptions) otherwise deductible by the corporation in a taxable year. The bill also expands the definition of a public corporation to include foreign corporations publicly traded through American depositary receipts (ADRs) and certain large private corporations and S corporations. These changes are effective for taxable years beginning after Dec. 31, However, the changes do not apply to a written binding contract with the covered employee that was in effect on Nov. 2, 2017 that is not materially modified after that date. Once a contract is renewed, compensation paid under the contract becomes subject to these changes. Under the bill, certain employees of a private company that grants stock options or RSUs to at least 80% of full-time employees (taking into account all employees in a controlled group) can elect to defer recognition of income beyond the time when income is generally recognized under current law. Full-time employees are employees who work an average of 30 or more hours per week. For purposes of the 80% requirement, employees can receive varying amounts of options or RSUs, but all of them must receive the same type of award (either options or RSUs), and must receive more than a de minimis amount. The election to defer income recognition must be made within 30 days of vesting. If the election is made, income recognition is generally deferred until the earlier of when the stock becomes transferable to another party (including to the employer), or the employer has an initial public offering. However, if neither of these occurs within five years after vesting, the employee must recognize the income on the date that is five years after vesting. If the employee becomes an excluded employee (as described later), he or she must recognize the income upon becoming an excluded employee. The employee may revoke the election at any time prior to when the compensation is recognized, and upon revocation, the income will be recognized. Excluded employees are any individuals who have ever been the CEO or CFO (including their family members), any individuals who have owned more than 1% of the employer in the current year or any of the previous 10 calendar years (including family members), and any individuals who have been among the four highest paid employees in the current year or any of the previous 10 calendar years. These individuals cannot receive grants that qualify for the special tax treatment. If the election is made, the compensation income is equal to the stock value at the time the stock is transferred and is vested, less any amount paid for the stock by the employee. Any further increase in value is capital gain. The employer receives a deduction at the same time the employee recognizes income, and the deduction amount equals the employee s income. This special tax treatment is not available if the employee has the right immediately upon vesting to either sell the stock to the employer or settle the award in cash. With respect to options, the election may be made by individuals who receive grants of nonstatutory stock options or incentive stock options, as well as grants under an employee stock purchase plan. If the election is made, any special taxation rules that would otherwise apply to the grants, such as special rules for incentive stock options and employee stock purchase plans, would no longer apply. These provisions apply to stock attributable to options exercised, or RSUs settled, after Dec. 31, (m) (2) through 162(m)(4) 83(i) (new) 2 Final tax reform bill employee compensation and benefits provisions

3 Qualified moving expense reimbursements Current tax law allows an employee to exclude from income certain moving expense reimbursements provided by an employer. Qualified bicycle commuting reimbursement Current tax law allows employees to exclude from income up to $20 per month of qualified bicycle commuting expenses reimbursed by their employers. Employee achievement awards Current tax law generally excludes from an employee s income up to $1,600 for length of service or safety achievement awards of tangible property. An employer may take a deduction for employee achievement awards, but the deduction is limited. Qualified transportation benefits employers can provide certain transportation benefits to employees on a tax-free basis, and can take a deduction for providing the benefits. These benefits are commuting via mass transit and parking (tax-free up to $255 per month in 2017), and bicycle costs (tax-free up to $20 per month in 2017). Fringe benefits The bill repeals the exclusion for qualified moving expense reimbursements from an employee s income. The exclusion is no longer available after Dec. 31, 2017, but becomes available again beginning in The bill repeals the exclusion from employee income of qualified bicycle commuting expense reimbursements. The exclusion is no longer available after Dec. 31, 2017, but becomes available again beginning in The bill retains the current tax treatment of employee achievement awards. However, in order for this treatment to apply, the bill provides that employee achievement awards may not take the form of cash, cash equivalents, gift coupons, gift certificates (other than arrangements conferring only the right to select and receive tangible personal property from a limited array of items pre-selected or preapproved by the employer), vacations, meals, lodging, tickets to theater or sporting events, stocks, bonds, other securities, and other similar items. These changes go into effect for amounts paid or incurred after Dec. 31, The bill eliminates the employer deduction for these benefits. This change is effective for amounts paid after Dec. 31, , , , (f)(1) 3 Final tax reform bill employee compensation and benefits provisions

4 Recharacterization of certain Roth IRA conversions Current tax law allows individuals to convert an amount from a traditional IRA to a Roth IRA, and then reconvert the amount back to a traditional IRA, thereby unwinding the original conversion. The reconversion can occur any time up to the due date of the individual s tax return for the year of the original conversion. Extended rollover period of plan loan offsets Current tax law permits defined contribution plans to allow plan loans. On the date an employee s plan or employment terminates while the employee has a plan loan outstanding, the employee has 60 days from that date to repay the loan or contribute the loan balance to an IRA to avoid a taxable distribution. Retirement plans The bill repeals the rules allowing a conversion to a Roth IRA to be reconverted to a traditional IRA. This is effective for taxable years beginning after Dec. 31, The bill extends the due date of a defined contribution plan loan repayment or contribution to an IRA to the due date of an employee s tax return (including extensions) for that year. The plan loan due date extension is effective after Dec. 31, A(d) 402(c)(3) (new) 4 Final tax reform bill employee compensation and benefits provisions

5 Unrelated business taxable income for tax-exempt organizations Excise tax on tax-exempt organization executive compensation Length of service award plans A length of service award earned by a bona fide volunteer on account of qualified services does not provide for the deferral of compensation for purposes of section 457 if the amount of the award that accrues each year is not in excess of $3,000. Tax-exempt entities The bill treats funds used to pay for employee transportation fringe benefits, onpremises gyms and other athletic facilities as unrelated business taxable income. This takes effect for amounts paid after Dec. 31, The bill subjects tax-exempt organizations to a 21% excise tax on compensation in excess of $1 million paid to any of its five highest-paid employees ( covered employees ) for the tax year, excluding payments to tax-qualified retirement plans or amounts excludable from the employee s income. Once an employee is a covered employee, he or she remains a covered employee for all subsequent years, even if he/she is no longer among the top five highest-paid employees. Compensation counts towards the $1 million limit when it becomes vested, including vested nonqualified deferred compensation. Compensation paid to a doctor, nurse or veterinarian that is directly related to the performance of medical or veterinary services is not taken into account in identifying covered employees. In addition, excess parachute payments made to covered employees are subject to a separate 21% excise tax. The bill defines excess parachute payments as any payments contingent upon the employee s separation from employment. The tax is triggered if the parachute payments exceed three times the employee s base amount. Base amount is the employee s average compensation for the prior five years. If the tax is triggered, the tax is equal to 21% of the amount by which the parachute payments exceed one times the base amount. These taxes take effect for taxable years beginning after Dec. 31, In addition to treating the top five highest-paid employees in that year as covered employees, an employer must count the top five highest-paid employees in the preceding year (the taxable year beginning after Dec. 31, 2016) as covered employees. The bill changes the length of service award annual threshold from $3,000 to $6,000, and provides that the annual threshold is adjusted annually for the cost of living. The bill also contains rules for calculating the actuarial present value of a defined benefit plan for purposes of applying the $6,000 annual limit. These changes are effective for taxable years beginning after Dec. 31, (new) 457(e)(11)(B) 5 Final tax reform bill employee compensation and benefits provisions

6 Affordable Care Act individual shared responsibility payments ( individual mandate ) individuals are generally required to be enrolled in minimum essential health coverage or pay an excise tax. Partnership interests held in connection with performance of services (carried interests) A carried interest is a right given to a fund manager to receive a percentage of profits. income from a carried interest generally takes the form of a capital gain when the fund sells investment assets. If the asset is held for more than one year, the gain is treated as a long-term capital gain. Employer credit for paid family and medical leave Other items The bill eliminates the individual mandate, effective with respect to health care coverage for months beginning after Dec. 31, For carried interests involving investment and real estate businesses, the bill requires that an investment be held for more than three years in order for the gain to be treated as a long-term capital gain. Gains on assets held for less than that amount of time are short-term capital gains. Under the provision, the fact that an individual may have included an amount in income upon acquisition of the partnership interest, or that an individual may have made a section 83(b) election, does not change the three-year holding period requirement. This rule does not apply to any capital interests in a partnership, as long as the capital interest is proportional to the amount of capital contributed, or to any interest that was taxable as compensation upon receipt or vesting. This provision is effective for taxable years beginning after Dec. 31, The bill introduces a temporary employer credit that allows eligible employers to claim a general business tax credit equal to 12.5% of qualifying employee wages paid during any period in which the employee is on family and medical leave, as long as the program s payment rate is 50% of the employee s normal wages. The maximum leave period that qualifies for the credit for a tax year is 12 weeks. The credit is increased by 0.25% (but not above 25% in aggregate) for each percentage point by which the program s payment rate exceeds 50% of the employee s normal wages. Eligible employers are employers that provide all qualifying full-time employees at least two weeks of annual paid family and medical leave and provide part-time employees an amount of leave on a pro-rata basis. Qualifying employees are employees with one year or more of service with wages that do not exceed $72,000 (as indexed for inflation in 2018). The credit is effective for wages paid under a qualifying program in 2018 and A 83, 1061 (redesignated), 1062 (new) New 6 Final tax reform bill employee compensation and benefits provisions

7 Contacts Eddie Adkins Partner Washington National Tax Office T E eddie.adkins@us.gt.com Jeffrey Martin Partner Washington National Tax Office T E jeffrey.martin@us.gt.com Tax Professional Standards Statement This content supports Grant Thornton LLP s marketing of professional services and is not written tax advice directed at the particular facts and circumstances of any person. If you are interested in the topics presented herein, we encourage you to contact us or an independent tax professional to discuss their potential application to your particular situation. Nothing herein shall be construed as imposing a limitation on any person from disclosing the tax treatment or tax structure of any matter addressed herein. To the extent this content may be considered to contain written tax advice, any written advice contained in, forwarded with or attached to this content is not intended by Grant Thornton LLP to be used, and cannot be used, by any person for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code. GT.COM Grant Thornton refers to Grant Thornton LLP, the U.S. member firm of Grant Thornton International Ltd (GTIL), and/or refers to the brand under which the GTIL member firms provide audit, tax and advisory services to their clients, as the context requires. GTIL and each of its member firms are separate legal entities and are not a worldwide partnership. GTIL does not provide services to clients. Services are delivered by the member firms in their respective countries. GTIL and its member firms are not agents of, and do not obligate, one another and are not liable for one another s acts or omissions. In the United States, visit grantthornton.com for details Grant Thornton LLP All rights reserved U.S. member firm of Grant Thornton International Ltd.