Employee Benefit Plan Implications of the Tax Cuts and Jobs Act
While the business and individual provisions of the Tax Cuts and Jobs Act (TCJA) are currently the focus of attention for many, those responsible for employee benefit plan administration need to be aware of the TCJA provisions that impact day-to-day employee benefit plan administration. As the TCJA was implemented January 1, 2018, it’s imperative that administrators act now to review plan operations and ensure compliance.
Changes to Taxable Wages
Several items that were previously excluded from taxable wages are now required to be included in gross wages and subject to taxes. These items include the following:
- Employee achievement awards
Non-cash awards given to employees under a qualified employee achievement plan are excluded from taxable wages up to $1,600 per year. As a result of the TCJA, cash, cash equivalents, gift cards, event tickets, and other similar items awarded to employees are no longer exempt. Any such items awarded to employees must now be included in taxable wages.
- Moving expense reimbursements
Except in the case of an armed forces member on active duty who is moving pursuant to a military order, these reimbursements are now included in taxable wages.
- Employee bicycle commuting reimbursements of up to $20 a month
These reimbursements are now included in taxable wages without exception.
Plan administrators should review their unique definition of eligible plan compensation outlined in their plan documents and ensure that amounts now considered taxable wages are included in 401k deferral calculations as necessary.
For example, if a company had eligible plan compensation of “W-2 wages” with “no exclusions” outlined in any of their plan documents, consider the following employee scenario:
|Base W-2 wages:||$50,000|
|Moving expense reimbursement:||$2,500|
|Employee 401k deferral %||5%|
|Employer 401k match %||2.5%|
|Pre TCJA||Post TCJA|
|EE 401k deferral required||$2,500||$2,625|
|ER 401k deferral required||$1,250||$1,313|
Loan Transfer Following Termination of Employee or Plan
Certain employees who have taken a loan from an employee benefit plan now have an extended timeline to avoid taxable distribution treatment of the loan amount. Rather than only 60 days, plan participants who have either separated from employment or whose plan terminates now have until the due date for filing their tax return (including extensions) to contribute the loan amount to an IRA to avoid a taxable distribution.
This extended timeline should be communicated to employees in the event of an employment or plan termination, but otherwise will not affect the day-to-day plan administration.
Plan of Action
As a result of the TCJA, previously excluded items are now included in taxable wages. Plan administrators should review their specific plan provisions to ensure that the wages used in deferral calculations and the plan’s annual compliance testing are accurate following the TCJA changes.
Our employee benefit team is always ready to help. Please contact us for more information.