The Tax Cuts and Jobs Act (TCJA) was the most extensive overhaul of the tax code in three decades. This piece of legislation affects just about every individual and organization in the US. Its changes to pension plan contributions, executive compensation and fringe benefits present both challenges and opportunities. Let’s review some of the significant ways tax reform impact an organization’s workforce.
Businesses with a defined benefit pension plan may be able to generate deductions on their 2017 return by making contributions during 2018.
For calendar-year end pension plans, contributions made before the earlier of the tax return filing date or September 15, 2018, may be deducted at the 2017 corporate tax rate of 35%. These contributions can be funded with cash from operations, borrow-to-fund, company stock, company debt, company real estate or other in-kind assets.
The contributions will need to meet the normal deductibility requirements for pension contributions and minimum funding rules. Time is running out to make these contributions for 2017. Employers should therefore act fast to evaluate potential funding sources and their potential impact on tax deductions and the balance sheet.
The TCJA made several significant changes to executive compensation. Section 162(m) of the Internal Revenue Code prohibits a public company from deducting compensation paid to a “covered employee” in excess of $1 million per year. Before the TCJA, the $1 million limit didn’t apply to performance-based compensation or to commissions. The principal financial officer (CFO) of a public company was not considered a “covered employee” for purposes of the $1 million limit.
The TCJA repealed the performance-based compensation exception to the $1 million deduction cap. It also renamed a company’s CFO as a covered employee. Although these changes generally apply to tax years beginning after December 31, 2017, the TCJA provides some transition relief. These amendments don’t apply to written binding contracts in effect as of November 2, 2017, as long as they are not materially modified after that date.
Employers should review existing contracts in light of these changes. They also should determine the potential immediate impact on deferred tax assets and review their post-tax-reform executive compensation strategies.
Employer-provided fringe benefits
The TCJA made changes to employer-provided fringe benefits, including eliminating:
- deduction for entertainment expenses
- exclusion for bicycle commuting benefits
- the 100% deduction for the cost of employee meals provided for the convenience of the employer on or near the employer’s business premises, and
- favorable treatment of employee moving expenses, with an exception for certain active-duty members of the Armed Forces.
These changes may be small for many employers. However, it’s a good idea to start quantifying the cost impact of these changes. Consider whether they need to modify expense reimbursement, relocation, payroll and other policies to ensure they still make sense in light of tax reform.
The TCJA’s impact on your workforce will impose additional costs, compliance burdens and challenges for businesses. But it also presents opportunities. Time is of the essence, especially when it comes to making pension plan contributions for 2017. Consider these opportunities as soon as possible. Taking into account both the short- and long-term impacts of tax reform can give you a competitive advantage.
With tax season fast approaching, prepare yourself. Get your free digital copy of our Tax Reform white paper today!