For many years tax exempt organizations and retirement plan trusts have been permitted to avoid tax on income generated by unrelated trades or businesses they hold by netting the gains, losses, and deductions among those trades or businesses. The Tax Cuts and Jobs Act modifies those rules, increasing the likelihood that such entities must report, and pay tax on, UBTI.
When the Department of Labor (“DOL”) delayed by 90 days the date by which ERISA plans were required to comply with a set of disability claims and appeals regulations issued in the waning days of the Obama Administration, we predicted that a further delay – or even a complete withdrawal – of the regulations could be in the works. As it turns out, we were wrong. Instead, the DOL announced in early January that the regulations will become fully applicable on April 1st – and without change.
Although the main feature of the Tax Cuts and Jobs Act is a significant reduction in the corporate federal income tax rate, the Act also makes a number of significant changes to the rules governing employer-sponsored retirement plans and individual retirement accounts. From plan loans to hardship withdrawals and Roth recharacterizations, employers should make sure that they understand how these new rules might affect them.
Although the recent Tax Cuts and Jobs Act eliminates the ACA individual mandate, the employer mandate, ACA benefit mandates, and ACA reporting requirements remain in effect. Thus, employers should continue to be mindful of and comply with their obligations under the ACA.
This is the second in a series of articles by which the Spencer Fane LLP Employee Benefits Practice Team will explain key changes made in the employee benefits area by the Tax Cuts and Jobs Act (Public Law 115-97), which was signed into law on December 22, 2017. In addition to establishing new rules for transportation fringe benefits (see our first article in this series), the Act makes a number of changes that may affect how employers structure their executive compensation programs. This article describes the Act’s impact on for-profit employers, and outlines options that those employers should consider for their compensation arrangements.
Although the recent Tax Cuts and Jobs Act largely retains the favorable tax treatment afforded employees who receive employer-provided transportation assistance, it denies employers any tax deduction for providing these tax-favored benefits. Moreover, tax-exempt employers will now be subject to unrelated business income tax on such benefits. Because the new rules took effect as of January 1, 2018, employers currently sponsoring such programs should promptly evaluate their options.
The Affordable Care Act (“ACA”) imposed reporting requirements on health coverage providers (including self-funded employer plans) and “applicable large employers” (those with 50 or more full-time employees). For health coverage provided during both 2015 and 2016, the IRS extended the deadline for issuing certain of the required reporting forms. In Notice 2018-06, the IRS has now granted a similar extension with respect to reporting health coverage provided during calendar-year 2017.
Although the GOP tax reform bill reduces to zero the penalty for failing to comply with the Affordable Care Act’s individual coverage mandate, it does nothing to alleviate the employer ACA mandate. Coincidentally, the IRS has just started issuing notices of potential penalty assessments under that employer mandate (commonly known as the “play-or-pay” provision).
These notices take the form of a “Letter 226J” (this notation appears in the footer of each page), and the Letter makes crystal clear the amount of the potential penalty assessment (which can be substantial). This dollar amount appears in bold on the second line of the Letter’s text.
On November 29, 2017, the Department of Labor granted an extension of the transition period for the Fiduciary Rule’s Best Interest Contact Exemption and Principal Transaction Exemption, and delayed the applicability date of the amendments to Prohibited Transaction Exemption 84-24. The new transition period will end on July 1, 2019, rather than January 1, 2018. The Department also extended the temporary enforcement policy in Field Assistance Bulletin 2017-02 to July 1, 2019. Thus, financial institutions and advisers impacted by the Fiduciary Rule and related exemptions remain subject to the same requirements as they have been since June 9, 2017, when the Fiduciary Rule and the Impartial Conduct Standards became applicable.
Despite rumors to the contrary, the tax bill introduced into the House of Representatives by the Republican Party leadership would do nothing to restrict employees’ ability to make pre-tax deferrals to 401(k), 403(b), or 457(b) plans. Trial balloons had suggested that pre-tax deferrals might be limited to only half of the overall annual deferral limit (or even less), with any remaining deferrals made only on a “Roth” (after-tax) basis. But at least for now, “Rothification” appears to be dead.
What the House bill would do, however, is perhaps even more surprising. A slew of tax-favored fringe benefits would be eliminated. And nonqualified deferred compensation as we now know it would be entirely transformed. Incredibly enough, most of these changes would take effect as of January 1, 2018 – less than two months after the bill’s introduction.