The proposed Tax Cut and Jobs Act (“TCJA”) has generated a number of big stories with big numbers, such as $1.0 trillion to lower individual tax rates and $1.5 trillion to lower corporate tax rates, but, also lurking in the 430-page draft, are important smaller provisions that will affect the HR world.
Overall, TCJA reduces individual and corporate taxes and recoups some of that lost revenue by eliminating a number of tax deductions. Major deductions impacted by TCJA include the deduction for interest on home mortgages and the deduction for state and local taxes. Significantly, the tax treatment of retirement and healthcare benefits were unscathed by TCJA. A number of less visible compensation and benefits programs are impacted by TCJA. Here are some of the proposed changes that may have been overshadowed by the headline stories:
- Eliminate many types of nonqualified deferred compensation plans. TJCA repeals Section 409A of the Code and requires that deferred compensation is taxable when there is no longer a substantial risk of forfeiture (i.e., receipt of compensation is no longer subject to the future performance of services). TJCA also eliminates the ability of nongovernmental not-for-profit employers to utilize Section 457 of the Code to establish deferred compensation plans.
- Ease rules for hardship distributions. TCJA eases restrictions on hardship distributions from retirement plans, eliminating the 6-month suspension current imposed and allowing access to employer contributions.
- Eliminate various employment-related tax exemptions. A number of employee benefit programs will lose tax-favored status, including dependent care assistance, adoption assistance, reimbursement of moving expenses and education assistance.
- Expand restrictions on compensation over $1 million. TJCA extends the $1 million cap on deductible compensation paid by publicly traded companies to include performance-based pay. TJCA also imposes a new 20 percent excise tax on compensation over $1 million paid by tax-exempt organizations to their five-highest paid employees.
- Deduction for Health Care Expenses. TCJA eliminates the deduction for health care expenses over 10% of income.
TJCA also included a number of provisions that are targeted at programs maintained by colleges and universities. These include eliminating the tax-favored treatment of tuition reduction plans offered to employees of colleges and universities and a 1.4 percent excise tax on net investment income of the endowments of private colleges and universities.