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Tax Reform Brings Big Changes to Employees' Fringe Benefits

by
Frank Jenkins Jr
on
3/20/2019
Tax Reform Brings Big Changes to Employees' Fringe Benefits

Roughly 90% of America’s workers are employees, and the vast majority of them receive some benefits from their employer. Though many view employee benefits as strictly being offered for the sake of the worker, the truth is that in providing these incentives, employers also get a bonus. Recent changes to the U.S. tax code had a direct impact on many of those benefits, with some having a positive effect and some having an adverse effect. It is important for both workers and those who employ them to understand precisely the changes that tax reform has brought so that they can make appropriate adjustments. It is also important to know which benefits have not been affected.

Unaffected benefits

Dependent Care – When companies offer dependent care assistance plans for their employees, it allows them to set aside funds to be used for expenses specific to the care of their dependents while allowing those funds to be excluded from their taxable income. There are definite limits on how much this benefit can be worth, with the employee able to take advantage of the lower of either a $5,000 benefit (or $2,500 for those filing as married but separate) or the employee’s earned income (if filing married then this is limited to the earned income of the spouse that has the lower income). Any payment into the dependent care fund that exceeds the limit is required to be included in the employee’s annual taxable income.

Group Term Life Insurance – Group term life insurance up to any value can be offered by an employer to their employees, but only the first $50,000 of coverage is considered non-taxable. Any coverage that exceeds $50,000 is deemed to be taxable income, and since its value is assigned based on information from a table used by the IRS rather than the actual cost to the employer, there is a very real possibility that employees who either opt for or automatically receive life insurance over the benefit limit will end up paying taxes on more than has actually been spent on their behalf. Similarly, for employees whose advanced ages make coverage above $50,000 particularly costly on the IRS table, it may make sense to look elsewhere for additional coverage.

Qualified Educational Assistance Programs – One of the most popular benefits offered to employees is the availability of a qualified educational assistance program that provides them with the opportunity for advancement through instruction or training that they pursue on their own. Employers can offer up to $5,250 annually, with no restrictions on whether the courses being taken are related to their job advancement, or even whether it is meant to lead to a degree.  Employees are not able to take credits or deductions if the benefit is earmarked as an education assistance benefit separate from their taxable income

Affected Benefits

Achievement awards – Companies have long been able to reward excellent performance through achievement awards that traditionally were not taxable as long as they weren’t for more than $400 (or $1,600 if part of a qualified plan award, defined as an established written plan or program not favored towards highly compensated employees.) Since the passage of tax reform, the only way that these awards can be nontaxable is if they are in the form of tangible items This excludes cash as well as numerous specific cash-equivalent items, including tickets to entertainment events, stocks, bonds, gift certificates (unless pre-selected or pre-approved from a limited selection), gift cards, etc.

Qualified Transportation Fringe Benefits – Most employees have some kind of commute to work, and have traditionally been able to deduct some of those expenses, as well as receiving limited compensation to defray those costs. Likewise, employers have been able to deduct their expenses for providing mass transit or parking passes to their employees or to provide transportation to their employees themselves. Tax reform eliminated  several of these benefits, including employers’ tax deduction, the $20-per-month tax-free reimbursement that employers were previously able to offer to employees for the cost of commuting via bicycle, and also the $260 benefit that was available in 2018 for commuting (unless the costs of commuting are identified as essential to the employee’s safety, in which case it is limited to $265 per month.) Tax reform did not impact the tax-free benefit for qualified parking or transit passes. Those benefit limits rose from $260 per month in 2018 to $265 per month in 2019.

Moving expenses – When an employee accepts a job with an employer who is in a distant location, or even when they are assigned to a different location with their existing employer, they have traditionally been able to receive compensation for the move on a tax-free basis, as well as to deduct any additional expenses from their taxable income. That capability has been removed for all but military personnel on active duty required to move based on military orders. For all others, the deduction stopped being available at the end of 2017 and will not be available again until after 2025, and if their employer reimburses them for their moving costs, that compensation is considered taxable income.

The changes that tax reform made on American’s lives are significant, and not all of them have had an immediate impact, but they are starting to be felt now. If you have any questions on other areas where the changes in the tax law have impacted you, contact a business tax professional to set up an appointment.

Frank Jenkins, CPA writes for TaxBuzz, a tax news and advice website. Reach him at [email protected].

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Frank Jenkins Jr

Frank Jenkins Jr

Frank Jenkins Jr. is the managing partner of Adams, Jenkins & Cheatham, a CPA practice based in Midlothian, VA. Frank specializes in Consulting services, tax planning, accounting, audit & assurances. "I genuinely care about our clients because I have a personal connection with them. This job requires me to multi-task and work under tight deadlines. I get great professional satisfaction from balancing firm and client commitments while building a strong team here at AJC."

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