House tax bill would eliminate favorable tax treatment for several fringe benefits

House Republicans on November 2 unveiled their much-anticipated tax reform legislation, the Tax Cuts and Jobs Act (HR 1). The 429-page bill represents the House Ways and Means Committee’s first legislative offer to significantly overhaul the U.S. Tax Code. The measure contains several benefits-related items highlighted below.

Dependent care assistance.

The value of employer-provided dependent care assistance programs are excluded from employees’ income up to a limit of $5,000 per year ($2,500 for married filing separately) to help pay for work-related expenses of caring for a child under the age of 13 or spouses or other dependents who are physically or mentally unable to care for themselves. Work-related expenses are those that help an individual work or look for work. Dependent care assistance programs must be part of a written plan of the employer that does not discriminate in favor of highly compensated employees. The exclusion for dependent care assistance programs would be repealed, effective for tax years beginning after 2017.

Employer-provided education assistance.

Currently, employer-provided education assistance is excluded from income. The exclusion is limited to $5,250 per year and applies to both graduate and undergraduate courses. The education assistance must be part of a written plan of the employer that does not discriminate in favor of highly compensated employees. The deduction for qualified tuition and related expenses would be repealed. The exclusion for qualified tuition reduction programs and the exclusion for employer-provided education assistance programs would also be repealed. The exclusion for education assistance programs would be effective for amounts paid or incurred after 2017.

Medical Savings Account.

Now an individual may claim an above-the-line deduction for contributions to an Archer Medical Savings Account (MSA) and exclude from income employer contributions to an MSA. In general, Archer MSAs may be set up by an individual working for a small employer and who participates in the employer’s high-deductible health plan. The total amount of monthly contributions to an Archer MSA may not exceed one-twelfth of 65% of the annual deductible for an individual with a self-only plan and one-twelfth of 75% of the annual deductible for an individual with family coverage. Distributions from the accounts used to pay qualified medical expenses are not taxable. Archer MSAs may not be established after 2005. Archer MSA balances may be rolled over on a tax-free basis to another Archer MSA or to a Health Savings Account (HSA). Under the provision, no deduction would be allowed for contributions to an Archer MSA, and employer contributions to an Archer MSA would not be excluded from income. Existing Archer MSA balances, however, could continue to be rolled over on a tax-free basis to an HSA. The provision would be effective for tax years beginning after 2017.

Employer-provided housing.

The exclusion for housing provided for the convenience of the employer and for employees of educational institutions would be limited to $50,000 ($25,000 for a married individual filing a joint return) and would phase out for highly compensated individuals (income of $120,000 for 2017, as adjusted for inflation) at a rate of one dollar for every two dollars of adjusted gross income earned by the individual beyond the statutory threshold of being highly compensated. The exclusion also would be limited to one residence, effective for tax years beginning after 2017.

Employee achievement awards.

Currently, employee achievement awards are excluded from employees’ income. To qualify for the tax exclusion, an employee achievement award must be given in recognition of the employee’s length of service or safety achievement at a ceremony that is a meaningful presentation. Furthermore, the conditions and circumstances cannot suggest a significant likelihood that the payment is disguised compensation. The employee is taxed to the extent that the cost (or value, if greater) of the award exceeds the employer’s deduction for the award. The employer’s deduction for employee achievement awards for any employee in any year cannot exceed $1,600 for qualified plan awards, and $400 otherwise. A qualified plan award is an employee achievement award that is part of an established written program of the employer, which does not discriminate in favor of highly compensated employees. In addition, the average award (not counting those of nominal value) may not exceed $400. The provision would repeal the exclusion for employee achievement awards, so that such awards would constitute taxable compensation to the recipient. The provision also would repeal the restrictions on employer deductions for such awards, effective for tax years beginning after 2017.

Moving expenses reimbursement.

Under current law, qualified moving expense reimbursements provided by an employer to an employee are excluded from the employee’s income. Qualified moving expenses are payments received by an individual from an employer as a payment for or reimbursement of expenses by an employee that would be deductible as moving expenses under section 217 if directly paid or incurred by the individual. l the exclusion for qualified moving expense reimbursements would be repealed, effective for tax years beginning after 2017.

Adoption assistance.

The provision would repeal the exclusion for adoption assistance programs, effective for tax years beginning after 2017.

Employer-provided child care.

The credit for employer-provided child care would be repealed, effective for tax years beginning after 2017.

Other fringe benefits.

No deduction would be allowed for entertainment, amusement or recreation activities, facilities, or membership dues relating to such activities or other social purposes. In addition, no deduction would be allowed for transportation fringe benefits, benefits in the form of on-premises gyms and other athletic facilities, or for amenities provided to an employee that are primarily personal in nature and that involve property or services not directly related to the employer’s trade or business, except to the extent that such benefits are treated as taxable compensation to an employee (or includible in gross income of a recipient who is not an employee). The 50% limitation under current law also would apply only to expenses for food or beverages and to qualifying business meals under the provision, with no deduction allowed for other entertainment expenses. Furthermore, no deduction would be allowed for reimbursed entertainment expenses paid as part of a reimbursement arrangement that involves a tax-indifferent party such as a foreign person or an entity exempt from tax. The provision would be effective for amounts paid or incurred after 2017. The provision could affect what fringe benefits employers offer to employees.

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