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By Lydia O’Neal
Companies probably won’t scrap all the employee perks that have lost their tax breaks under the new tax law, but instead will take a hard look at how they shape their benefits packages.
The 2017 tax law slashed myriad reimbursement program deductions and income exclusions for employee commuting costs, entertainment expenses, various food and beverage expenditures, the cost of relocating, and certain awards for employee achievement.
By effectively making those benefits more expensive, the 2017 tax act’s adjustments may drive employers to allocate a larger portion of funds set aside for employee-related expenses to other benefits, such as health care, retirement, or student loan help, as a way to make their perks more tax-efficient, human resources and tax professionals told Bloomberg Tax.
“Employers, as they examine their benefit offerings, may try to shift their benefit offerings to other areas that may not have been impacted by the new tax law,” said Chatrane Birbal, the Society for Human Resource Management’s senior adviser on government relations. “Some may very well move those benefits over to health care, or employer-provided education assistance.”
Still, many employers haven’t yet fully evaluated the impact of the law on their balance sheets and will have to do so before taking steps to restructure their benefits, said Christa Bierma, principal at Ernst & Young LLP’s National Tax Department and former benefits tax counsel with the Treasury Department’s Office of Tax Policy.
“It may be that once they run the numbers, they’ll have harder choices to make,” she said. “But at the moment, I haven’t had any clients tell me that that’s what they plan to do.”
Most of the deductions slashed by the law hadn’t been reduced or eliminated before, so it’s difficult to base expectations for the private sector’s response on historic trends, according to tax and HR professionals. But company behavior in anticipation of the Affordable Care Act’s “Cadillac tax,” an annual 40 percent levy on generous corporate-sponsored health plans slated to go into effect in 2022, may serve as a preview, Birbal said.
“What’s happening in that space is, as we get closer to 2022—and before, it was 2018 that it was going to go into effect—every year we saw employers really look at their health benefit offerings and try to reduce benefit offerings so that they would not be subject to the tax,” she said. “In the meantime, some employers were looking at shifting more of those resources toward retirement accounts, for example. So there goes the shift in benefit offerings.”
A slightly less benevolent company might do the reverse, maintaining transportation, entertainment, moving, or achievement award expenses while compensating for the higher costs of those benefits by chipping away at other compensation channels, said Kathleen Thomas, director of the Tax Institute at the University of North Carolina School of Law.
“It could just be deferring a raise, or a slightly smaller bonus spread out across a bunch of employees in ways that aren’t necessarily noticed,” she said. “But I would imagine, in some way, the extra costs would get passed on.”
Thomas and other tax professionals told Bloomberg Tax that companies may simply reimburse employees with cash in lieu of the nondeductible benefits, essentially passing the tax burden onto the individuals. Birbal and others, however, said employers aren’t discussing this option.
The employees who receive these perks aren’t the only ones vulnerable to the law’s changes to benefit deductions.
The American Moving and Storage Association (AMSA)—a trade group representing moving companies such as United Van Lines LLC, Atlas Van Lines Inc., and Mayflower Transit LLC—has pushed Congress to retain generous tax treatment of moving expenses. But while the employer deduction for moving expense reimbursements remains in place, the law eliminated the moving expense income exclusion, as well as the moving expense income deduction for individuals.
Companies seeking new hires who will have to relocate might compensate those employees with more cash for the move, as the reimbursement will be included in the employee’s taxable income and they won’t be able to deduct their own relocation expenses. That means the ultimate cost of relocation could not only get higher for employees, but for companies as well, which has all of AMSA’s members worried, said Paul Milotte, the group’s vice president of governmental relations.
“The effect on the industry, we believe, is negative,” Milotte told Bloomberg Tax. “It’s impossible to predict whether companies will gross up the people they’re trying to attract, but to medium and small businesses that are competing for workers, they’re not going to have that money.”
Aside from local ordinances mandating the provision of transit benefits, many companies will likely keep their now nondeductible perks in place simply because it would amount to “bad optics,” said Gray Hutchison, benefits and compensation practice group leader at the Raleigh, N.C.-based law firm Wyrick Robbins Yates & Ponton LLP.
In light of the daily news of big corporate bonuses, 401(k) contributions, and higher profits as a result of tax reform, a bit of stinginess would appear not only hypocritical, but illogical, as the fringe benefit deductions are less valuable under the lower corporate tax rate, and the new fringe benefit tax liabilities should be more than offset by the benefit of the drop in the rate, he noted.
“What’s this going to look like?” Hutchison said. “We’re getting a big tax break, and all of a sudden, we’re taking something away from employees just because we don’t get a deduction for it?”
SHRM’s Birbal said employees also are likely to be irritated if their employers took away benefits that have been in place for years. “Once the toothpaste is out of the tube, it’s really hard to put it back in,” she said. “So if you’re an employer and you are offering these benefits to your employees, it would behoove you to keep or maintain the majority of these benefits to maintain your competitive edge.”
Corporate perks like paid-for golfing outings with clients and transportation coverage aren’t doled out solely because they’re deductible, practitioners said.
“Are they going to decide not to do something because it’s not deductible? I don’t know, it depends how much they like it,” said Deborah Walker, national director of compensation and benefits at the accounting firm Cherry Bekaert’s office in Tyson’s Corner, Va. “I think people will keep taking clients out to dinner. People don’t take clients out to dinner because it’s a tax-deductible expense, they do it because they think they’re going to generate some work.”
Free transportation, food, and relocation services can also be a major draw for competitively sought-after employees in tech and engineering and, Walker said, relatively lower-income fields like nursing, where those small savings count.
In some areas, such as New York City, Washington, D.C., and the Bay Area, companies with a certain number of employees must provide pre-tax transit benefits—or, for the Bay Area, one of several alternative subsidized commute programs—or face penalties. But for workers in other urban areas with high costs of living and transportation, whether or not a company offers transportation benefit programs could be a major selling point, said Jan Jacobson, senior counsel on retirement policy at the American Benefits Council in Washington.
“You probably would see them kept in place more in areas where transportation is expensive, parking is expensive, public transit is expensive,” she said, even in the absence of a law mandating employer reimbursement of transit expenses.
(Corrects effective date of employee achievement award provision in the chart.)
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