Tax Reform Series I: Fringe Benefit and Health & Welfare Provisions

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1 January 12, 2018 If yu have questins, please cntact yur regular Grm attrney r ne f the attrneys listed belw: Kathryn Amin kamin@grm.cm (202) Jn Breyfgle jbreyfgle@grm.cm (202) Lisa Campbell lcampbell@grm.cm (202) Elizabeth Dld edld@grm.cm (202) Thmas Fitzgerald tfitzgerald@grm.cm (202) Christine Keller ckeller@grm.cm (202) Tamara Killin tkillin@grm.cm (202) David Levine dlevine@grm.cm (202) Rachel Levy rlevy@grm.cm (202) Luis Mazawey lmazawey@grm.cm (202) Mark Nielsen mnielsen@grm.cm (202) Seth Perretta sperretta@grm.cm (202) Tax Refrm Series I: Fringe Benefit and Health & Welfare Prvisins On December 22, 2017, President Trump signed int law H.R. 1, knwn as the Tax Cuts and Jbs Act. The new law is an verhaul f the Internal Revenue Cde and, as such, will have a significant impact n the rules gverning the taxatin f bth emplyers and emplyees. This is the first f a series f alerts in which we highlight the benefits-related tax prvisins f H.R. 1. Belw, we describe changes related t taxatin f fringe benefits and health and welfare benefits, and we utline next steps that emplyers and emplyees shuld cnsider. Fringe Benefit Prvisins 1. Emplyers May N Lnger Deduct Qualified Transprtatin Fringe Benefits and Certain Other Cmmuting Expenses Prir Law Emplyers culd generally deduct expenses fr prviding a qualified transprtatin fringe benefit. Qualified transprtatin fringe benefits are the prvisin f (r reimbursements r payments fr) transprtatin in a cmmuter highway vehicle, transit passes, qualified parking, and qualified bicycle cmmuting reimbursements. What Changed Emplyers may n lnger deduct: (1) any expenses incurred in prviding, paying, r reimbursing qualified transprtatin fringe benefits; r (2) any expenses fr prviding transprtatin fr an emplyee t cmmute between his r her residence and place f emplyment, except as necessary fr ensuring the emplyee s safety. Emplyers may cntinue t deduct qualified bicycle cmmuting reimbursements fr eight years. When Beginning in 2018, except fr qualified bicycle cmmuting reimbursements, which are nn-deductible beginning in Malclm Slee mslee@grm.cm (202) Christy Tinnes ctinnes@grm.cm (202) Vivian Turner vturner@grm.cm (202) Allisn Ullman aullman@grm.cm (202) Brigen Winters bwinters@grm.cm (202) Emplyers Cnsider restructuring nn-bicycle transprtatin and cmmuting benefits with vluntary after-tax emplyee cntributins. Cnsider whether t replace these benefits with increased taxable wages r ther fringe benefits that remain deductible by the emplyer.

2 Next Steps (Cntinued): Emplyees These nn-bicycle benefits are still excludable, s n changes are necessary unless the emplyer eliminates emplyer-paid benefits r restructures the prgram t be paid with after-tax emplyee cntributins. 2. Tax-Exempt Emplyers Must Include Certain Fringe Benefits in Unrelated Business Taxable Incme. Prir Law Emplyers exempt under Cde sectin 501(c) are subject t tax n unrelated business taxable incme ( UBTI ), which generally means incme derived frm an unrelated trade r business regularly carried n by the emplyer that is nt substantially related t the emplyer s exempt purpse. Fringe benefits prvided by such emplyers wuld nt cnstitute UBTI. What Changed T prvide parity with taxable emplyers, the definitin f UBTI nw includes the value f qualified transprtatin fringe benefits, any parking facility used in cnnectin with qualified parking benefits, and n-premises athletic facilities if such benefits wuld nt be deductible by a taxable emplyer. When Beginning in Tax-Exempt Emplyers Emplyees Cnsider restructuring transprtatin and cmmuting benefits with vluntary after-tax emplyee cntributins t avid unrelated business incme tax ( UBIT ). Cnsider whether t tax the benefits t avid UBIT. Cnsider whether t eliminate these benefits altgether. If the emplyer cntinues t prvide them, it may need t file Frm 990-T t reprt and pay the UBIT. Cnsider whether t replace these benefits with increased taxable wages r ther fringe benefits that are nt included in UBTI. These benefits are still excludable, s n changes are necessary unless the emplyer eliminates emplyer-paid benefits, taxes the benefits, r restructures the prgram t be paid with after-tax emplyee cntributins. 3. Emplyees Cannt Exclude Qualified Bicycle Cmmuting Reimbursements. Prir Law Emplyees culd exclude frm incme the value f qualified transprtatin fringe benefits prvided by his r her emplyer fr qualified bicycle cmmuting reimbursements, up t certain mnthly limits set frth by the IRS (fr 2017, up t $20 per mnth). 2 This publicatin is prvided fr educatinal and infrmatinal purpses nly and des nt cntain legal advice. The infrmatin shuld in n way be taken as an indicatin f future legal results. Accrdingly, yu shuld nt act n any infrmatin prvided withut cnsulting legal cunsel. T cmply with U.S. Treasury Regulatins, we als infrm yu that, unless expressly stated therwise, any tax advice cntained in this cmmunicatin is nt intended t be used and cannt be used by any taxpayer t avid penalties under the Internal Revenue Cde, and such advice cannt be quted r referenced t prmte r market t anther party any transactin r matter addressed in this cmmunicatin Grm Law Grup, Chartered 1701 Pennsylvania Ave NW Washingtn, DC All rights reserved.

3 What Changed Emplyees may nt exclude any qualified bicycle cmmuting reimbursements frm their incme. When (beginning with the 2026 tax year, qualified bicycle cmmuting reimbursements will again be excludible frm emplyees incme, but will n lnger be deductible by emplyers.) Emplyers Can cntinue t deduct qualified bicycle cmmuting reimbursements until Emplyees Must include these reimbursements in emplyees incme and W-2 wages and withhld incme and emplyment taxes accrdingly. Must be mindful that althugh these reimbursements are taxable at the federal level, state law may vary, especially in states that have special cmmuting rdinances. Cnsider whether t pt fr anther mde f cmmuting t avail themselves f the incme exclusin fr ther nn-bicycle cmmuting csts, t the extent available. 4. Emplyees Cannt Exclude r Deduct Qualified Mving Expense Reimbursements Prir Law Emplyees culd exclude frm incme the value f any qualified mving expense received as a payment r reimbursement. In additin, emplyees generally culd deduct unreimbursed qualified mving expenses as itemized deductins, subject t certain limits. What Changed Emplyees may nt exclude frm incme the value f any qualified mving expense reimbursements r payments and these amunts are treated as taxable supplemental wages. In additin, emplyees may nt deduct any unreimbursed qualified mving expenses. When (beginning with the 2026 tax year, emplyees can again exclude qualified mving expense reimbursements frm incme r deduct unreimbursed qualified mving expenses). Emplyers Emplyees Cnsider whether t include a taxable grss up fr mving expense reimbursements r payments r replace with additinal taxable wages. Can still deduct mving expense reimbursements r payments. Can n lnger deduct mving expenses, and expenses reimbursed by the emplyer are taxable. 3 This publicatin is prvided fr educatinal and infrmatinal purpses nly and des nt cntain legal advice. The infrmatin shuld in n way be taken as an indicatin f future legal results. Accrdingly, yu shuld nt act n any infrmatin prvided withut cnsulting legal cunsel. T cmply with U.S. Treasury Regulatins, we als infrm yu that, unless expressly stated therwise, any tax advice cntained in this cmmunicatin is nt intended t be used and cannt be used by any taxpayer t avid penalties under the Internal Revenue Cde, and such advice cannt be quted r referenced t prmte r market t anther party any transactin r matter addressed in this cmmunicatin Grm Law Grup, Chartered 1701 Pennsylvania Ave NW Washingtn, DC All rights reserved.

4 5. Cdifies Definitin f Items that Qualify fr the Emplyee Achievement Award Deductin. Prir Law Emplyers culd deduct the cst f emplyee achievement awards, subject t certain limits, and emplyees may exclude such awards frm incme. Emplyee achievement awards are items f tangible persnal prperty given t an emplyee in recgnitin f length f service r safety achievement, that are presented as part f a meaningful presentatin, and that meet ther requirements. Tangible persnal prperty was nt defined in the statute, but prpsed IRS regulatins defined it t exclude cash r certain certificates, vacatins, meals, ldging, theater and sprting event tickets, stcks, bnds, and ther securities. What Changed Cdifies a definitin f tangible persnal prperty similar t the definitin in the prpsed IRS regulatins. The statutry definitin excludes cash, cash equivalents, gift cards, cupns, gift certificates (with certain limitatins), vacatins, meals, ldging, theater r sprting event tickets, stcks, bnds, ther securities, and ther similar items. When Beginning in Emplyers Emplyees Cnsider whether t adjust emplyee achievement awards s that they cntinue t be deductible fr the emplyer and excludible fr the emplyee. Cnsider whether t reduce the amunt f the award s that it is deductible t the emplyer and excludable frm the emplyee s incme as a de minimis fringe benefit. N changes necessary. 6. Emplyers Generally Cannt Deduct Entertainment, Amusement, and Recreatin Expenses (with Limited Exceptins fr Emplyee Meals). Prir Law Emplyers culd deduct 50% f expenses fr: (1) entertainment, amusement, recreatin; (2) membership dues fr clubs rganized fr business, pleasure, recreatin r any ther scial purpse; and (3) a facility r prtin f a facility used fr a purpse in (1) r (2), but nly if the expenses directly relate t the cnduct f the emplyer s trade r business. There were certain exceptins that allwed an emplyer t deduct 100% f the expenses, hwever, such as if the emplyer included the value f the expense in the emplyee s incme. In additin, emplyers culd deduct 50% f the fd and beverage expenses assciated with their trade r business (e.g., meals cnsumed by emplyees n wrk travel) and 100% f the expenses related t prviding fd and beverages t emplyees that meet the de minimis fringe benefit requirements. 4 This publicatin is prvided fr educatinal and infrmatinal purpses nly and des nt cntain legal advice. The infrmatin shuld in n way be taken as an indicatin f future legal results. Accrdingly, yu shuld nt act n any infrmatin prvided withut cnsulting legal cunsel. T cmply with U.S. Treasury Regulatins, we als infrm yu that, unless expressly stated therwise, any tax advice cntained in this cmmunicatin is nt intended t be used and cannt be used by any taxpayer t avid penalties under the Internal Revenue Cde, and such advice cannt be quted r referenced t prmte r market t anther party any transactin r matter addressed in this cmmunicatin Grm Law Grup, Chartered 1701 Pennsylvania Ave NW Washingtn, DC All rights reserved.

5 What Changed Emplyers generally may nt deduct expenses fr: (1) entertainment, amusement, recreatin; (2) membership dues fr clubs rganized fr business, pleasure r any ther scial purpse; and (3) a facility r a prtin f facility used fr (1) r (2). The exceptins t the deductin limitatins, such as where the emplyer includes the value f the expense in the emplyee s incme, are retained. Emplyers may cntinue t deduct 50% f fd and beverage expenses assciated with their trade r business. Emplyers may als deduct 50% f expenses related t prviding fd and beverages n-premises that meets the requirements fr de minimis fringe benefits r is fr the cnvenience f the emplyer. When Beginning in 2018 (expenses fr n-premises meals are nn-deductible beginning in 2026). Emplyers Emplyees Review expense plicies in light f the lss f deductin t see if any exceptins are available that wuld cntinue t allw the emplyer t deduct the expense. Review the csts f meals and determine if changes need t be made t btain a full deductin (such as taxing emplyees n meals). The incme exclusin was nt changed, t the extent the expense is a de minimis fringe benefit, r is fr the cnvenience f the emplyer. 7. Emplyees Cannt Deduct Unreimbursed Trade r Business Expenses. Prir Law Emplyees culd generally take an itemized deductin fr unreimbursed trade r business expenses, subject t certain limitatins. What Changed Emplyees can n lnger take an itemized deductin fr unreimbursed trade r business expenses. This may result in grups f wrkers being treated differently because independent cntractrs can generally still deduct trade r business expenses. When (beginning with the 2026 tax year, emplyees can again take an itemized deductin fr unreimbursed trade r business expenses, subject t certain limitatins). Emplyers Emplyees Cnsider increasing wrking cnditin fringe benefits r accuntable plan expenses t make up fr the lss f the emplyee s deductin. Keep this lss f deductin in mind when cmpleting their tax returns. 5 This publicatin is prvided fr educatinal and infrmatinal purpses nly and des nt cntain legal advice. The infrmatin shuld in n way be taken as an indicatin f future legal results. Accrdingly, yu shuld nt act n any infrmatin prvided withut cnsulting legal cunsel. T cmply with U.S. Treasury Regulatins, we als infrm yu that, unless expressly stated therwise, any tax advice cntained in this cmmunicatin is nt intended t be used and cannt be used by any taxpayer t avid penalties under the Internal Revenue Cde, and such advice cannt be quted r referenced t prmte r market t anther party any transactin r matter addressed in this cmmunicatin Grm Law Grup, Chartered 1701 Pennsylvania Ave NW Washingtn, DC All rights reserved.

6 Health & Welfare Prvisins 1. Indexing fr Health FSA, HSA, and Cadillac Tax Dllar Threshlds is Changed frm CPI-U t Chained CPI-U. Prir Law The dllar threshlds fr emplyee cntributins t health flexible spending arrangements ( FSAs ), cntributins t health savings accunts ( HSAs ), and the 40% excise tax n high cst cverage (the Cadillac Tax ) were adjusted annually fr inflatin based n the cnsumer price index ( CPI-U ). What Changed The dllar threshlds are adjusted annually fr inflatin based n Chained CPI-U rather than CPI-U. Chained CPI-U is expected t result in relatively reduced inflatin adjustments cmpared t CPI- U. This means that the dllar threshlds will likely increase at a slwer rate than under prir law. When Unclear, but it appears t be effective beginning in Emplyers Emplyees Be n the lkut fr guidance frm the IRS regarding the 2018 threshlds fr FSAs and HSAs. The IRS released the 2018 threshlds in 2017 based n prir law, nt n chained CPI-U, and emplyers set maximum FSA and HSA cntributin limits accrdingly. It is unclear whether the IRS will cntinue t apply the already annunced maximum limits in 2018 r will annunce new 2018 limits smetime in Accrdingly, emplyers may need t adjust emplyees FSA and HSA electins fr 2018 and make any necessary crrectins. Depending n future IRS guidance, may need t adjust their FSA and HSA electins fr Emplyers May Claim a Tax Credit fr Certain Paid Family and Medical Leave Prvided t Emplyees. Prir Law Emplyers culd nt take a tax credit fr cmpensatin paid t emplyees during family and medical leave. What Changed Emplyers that pay emplyees during family and medical leave and meet certain requirements may temprarily claim a tax credit f 12.5% f the amunt f wages paid fr 12 weeks, increased by.25% fr each percentage pint by which the rate f payment exceeds 50% (nt t exceed 25% f the wages paid). T qualify fr the credit, the emplyer generally must have a leave plicy that allws all qualifying full-time emplyees at least 2 weeks f annual family and medical leave and pay at least 50% f the wages nrmally paid t the emplyee during the leave (and have cmmensurate plicies fr part-time emplyees). Certain types f leave, such as leave paid by a state r lcal gvernment r required by state r lcal law, are nt cnsidered family and medical leave fr this purpse. 6 This publicatin is prvided fr educatinal and infrmatinal purpses nly and des nt cntain legal advice. The infrmatin shuld in n way be taken as an indicatin f future legal results. Accrdingly, yu shuld nt act n any infrmatin prvided withut cnsulting legal cunsel. T cmply with U.S. Treasury Regulatins, we als infrm yu that, unless expressly stated therwise, any tax advice cntained in this cmmunicatin is nt intended t be used and cannt be used by any taxpayer t avid penalties under the Internal Revenue Cde, and such advice cannt be quted r referenced t prmte r market t anther party any transactin r matter addressed in this cmmunicatin Grm Law Grup, Chartered 1701 Pennsylvania Ave NW Washingtn, DC All rights reserved.

7 A qualifying emplyee is ne wh has been emplyed fr at least a year and, fr the preceding year, had cmpensatin less than $72,000 (fr 2018) i.e., 60% f the Cde sectin 414(q) cmpensatin threshld fr highly cmpensated emplyees. When 2018 and Emplyers Determine whether it is feasible (and desirable) t implement a leave plicy that satisfies the criteria t claim the credit. If s, review current leave plicies and determine if any changes are necessary t be able t claim the credit. Because certain types f leave dn t cunt twards the 2 week threshld, this may require that an emplyer prvide mre than 2 weeks f paid family and medical leave. Certain cntrlled grup rules apply, and thus, crdinatin with ther cntrlled grup members may be necessary. 3. N Individual Mandate Penalties. Current Law Mst individuals must have minimum essential cverage ( MEC ) r be subject t a penalty. What Changed The penalty fr nt having MEC is reduced t zer. When Beginning in Emplyers Emplyees The emplyer mandate penalties were nt repealed, but the eliminatin f the individual mandate penalties culd result in fewer emplyees triggering ptential emplyer mandate penalties because fewer emplyees may purchase cverage thrugh an exchange and receive a premium tax credit. Emplyer mandate reprting and MEC reprting were nt repealed, and thus, absent IRS guidance, emplyers must cntinue t file the Frms 1094-B/C and 1095-B/C. Might drp their cverage beginning in This publicatin is prvided fr educatinal and infrmatinal purpses nly and des nt cntain legal advice. The infrmatin shuld in n way be taken as an indicatin f future legal results. Accrdingly, yu shuld nt act n any infrmatin prvided withut cnsulting legal cunsel. T cmply with U.S. Treasury Regulatins, we als infrm yu that, unless expressly stated therwise, any tax advice cntained in this cmmunicatin is nt intended t be used and cannt be used by any taxpayer t avid penalties under the Internal Revenue Cde, and such advice cannt be quted r referenced t prmte r market t anther party any transactin r matter addressed in this cmmunicatin Grm Law Grup, Chartered 1701 Pennsylvania Ave NW Washingtn, DC All rights reserved.

8 4. Medical Expense Deductin is Reduced frm 10% t 7.5% f AGI fr 2017 and Prir Law Individuals culd deduct medical expenses t the extent the expenses exceed 10% f adjusted grss incme ( AGI ). What Changed The 10% threshld is temprarily reduced t 7.5%. When 2017 and Emplyers Emplyees N actin necessary. May be able t deduct medical expenses that they previusly culd nt deduct because the expenses were between the % threshld. * * * Althugh H.R. 1 was signed int law n December 22, 2017, it has significant impacts n taxatin f benefits fr bth emplyers and emplyees beginning with the 2018 tax year. As such, emplyers shuld clsely evaluate current fringe benefit and health and welfare fferings t understand hw they are impacted by the new tax law and cnsider whether changes may be necessary. Please cntact any f the attrneys listed here r yur regular Grm Law Grup attrney fr further infrmatin r t discuss next steps. 8 This publicatin is prvided fr educatinal and infrmatinal purpses nly and des nt cntain legal advice. The infrmatin shuld in n way be taken as an indicatin f future legal results. Accrdingly, yu shuld nt act n any infrmatin prvided withut cnsulting legal cunsel. T cmply with U.S. Treasury Regulatins, we als infrm yu that, unless expressly stated therwise, any tax advice cntained in this cmmunicatin is nt intended t be used and cannt be used by any taxpayer t avid penalties under the Internal Revenue Cde, and such advice cannt be quted r referenced t prmte r market t anther party any transactin r matter addressed in this cmmunicatin Grm Law Grup, Chartered 1701 Pennsylvania Ave NW Washingtn, DC All rights reserved.