Tax Reform proposals: Changes to Fringe Benefit Rules

Below is our analysis of the bill in its prior form. Check back soon for updates from the recently-released – and final – conference version.

These proposals from the Ways and means Committee of the House, if enacted, will impact fringe benefit programs of many employers. This guideline is effective November 7, 2017. We will keep it updated.

At first glance, some of these changes seem heartless, but the counterweights are the larger family credits for middle and lower income families. There will be winners and losers on this. We’ll analyze in more depth later so that employers can give better guidance to employees if these proposals are enacted.

1.     No Dependent Care Plans

Effective January 1, 2018, dependent care plans would no longer be offered.

  • It is not clear what would be done with carry-overs from 2017.
  • This effective date makes 2018 open enrollment (in late 2017) a bit confusing.
    • for 2018 open enrollment, and for carryovers from 2017, we recommend proceeding as you normally would.
    • If this effective date actually sticks, there will most likely be a procedure which provides for penalty-free transition.

The Child Care Credit of IRC §21 ($3,000 per qualifying dependent up to $6,000 maximum) seems to have escaped removal. Based on income, it ranges from 35% to 20% of qualifying expenses.

2.     No employer child care credit

For taxable years starting after January 1, 2018, Employers will no longer receive a tax credit equal to 25 percent of qualified expenditures for employee child care and 10 percent of qualified expenditures for child care resource and referral services. (Credits have been available up to $150,000 in total.)

3.     No education assistance plans

Effective January 1, 2018, employees will no longer qualify for an exclusion (up to $5,250) for employer-paid courses of study.

  • Employers will still be allowed to offer tax-free assistance, without dollar limits, for educational assistance which meets the conditions of the Working Condition Fringe benefit rules of IRC §132(d). No dollar limit applies.
    • Under §132(d), an educational expense is tax free only if it enables the employee to better perform his or her job.
    • Under §132(d), expenses are not tax deductible if they will enable the employee to qualify for a profession.
4.     No exclusion for employer-provided moving expenses

For taxable years starting after January 1, 2018, employer-provided moving expenses will no longer be tax free.

  • Unclear when this applies to benefits paid by a fiscal year employer. It would be logical for this to apply to the calendar year.
5.     No more adoption assistance programs

For taxable years starting after January 1, 2018, employer-provided adoption assistance plans will no longer be tax free.

6.     No exclusions for employee achievement awards

Effective January 1, 2018, this exclusion from income tax and FICA will not be permitted.

Under current IRC §74(c):

  • an employee achievement award is an item of tangible personal property given to an employee in recognition of either length of service or safety achievement and presented as part of a meaningful presentation. Gift certificates and other cash equivalents are not excludible.
  • The dollar limit is generally $400. Although non-discriminatory awrds which are qualified are excludible up to $1,600.
7.     Employer-provided housing will be partly taxable

Effective January 1, 2018, an employee may be partly (or fully) taxed on the value of employer-provided housing.

  • The allowable tax free value is equal to $50,000, reduced by $2 for every dollar of income in excess of $120,000.
  • The exclusion does not apply to more than one residence at any given time.
    • In the case of spouses filing a joint return, the one residence limit may be applied separately to each spouse for a period during which the spouses reside in separate residences provided in connection with their respective employments.