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United States - Update on Tax Cuts and Jobs Act

United States - Update on Tax Cuts and Jobs Act

In this GMS Flash Alert, we compare employment-related tax provisions in the conference report to the House and Senate bills that would impact incentive compensation, fringe benefits, retirement, and global mobility programs.

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On December 15, 2017, the conference committee approved the report of its agreement on the bill, H.R. 1, the “Tax Cuts and Jobs Act.”1 The conference report is a compromise, blending elements of both the previously passed House and Senate versions of the bill. In this GMS Flash Alert, we compare employment-related tax provisions in the conference report to the House and Senate bills that would impact incentive compensation, fringe benefits, retirement, and global mobility programs. (For prior comparison of the House- and Senate-passed bills, see GMS Flash Alert 2017-178 (December 5, 2017).

WHY THIS MATTERS

The conference agreement would limit or eliminate numerous deductions, exclusions, and credits while generally reducing tax rates. It also would include revisions to Internal Revenue Code section 162(m), a new election to defer compensation on certain stock options, and fringe benefit-related deduction limitations. If enacted, changes will need to be taken into account in future tax planning and considered in year-end planning currently underway.

Comparison Chart

  Conference Report

Alternative

(From House and/or Senate Bills)

Section 162(m) $1 Million Deduction Limit on Public Companies Expands scope to include CFOs in addition to CEOs and the next three highest compensated named executives.  Extends application to both current and former covered employees.  Public companies within the purview of section 162(m) also includes foreign companies traded through American depository receipts. Furthermore, repeals the often relied upon performance-based compensation exemption. Transition rule that the expanded provisions would not apply to written, binding contracts in effect on Nov. 2, 2017 (and not materially modified on or thereafter). Substantially similar provisions.
Nonqualified Deferred Compensation No provision. Although an initial provision repealed nonqualified compensation deferrals, section 409A was retained with income taxation generally upon distribution rather than vesting.  
Stock Option and Restricted Stock Unit Deferrals of Tax

Section 83 continues to apply to compensatory stock options.  

In addition, proposed section 83(i) provides that a “qualified employee” who receives “qualified stock” upon the exercise of an option (or settlement of a restricted stock unit) could elect to defer including the income that he or she would otherwise have been required to include for the year in which he or she receives the stock (or, if later, the first year for which the stock ceases to be “substantially nonvested”) until the earliest of the date

(i) on which the stock first becomes transferable, 

(ii) on which he or she first becomes an “excluded employee,” 

(iii) on which any stock of the issuing corporation first becomes readily tradable on an established securities market, 

(iv) five years after the date on which the stock first ceased to be “substantially nonvested,” or 

(v) as of which he or she revokes the deferral election.Election would be available for qualified stock on statutory options, but such options would no longer be treated as statutory options.

Income tax withholding would be required at highest individual rate. However, election would not change timing of FICA/FUTA withholding.  

Form W-2 would have new reporting requirements related to deferral election. 

Substantially similar provisions.
Worker Classification No provision included. No provision included.
Fringe Benefits with Limited Deductions  
Entertainment, amusement, and recreation activities and related facilities. Non-deductible. Substantially similar provisions.  However, House bill further prohibited reimbursement arrangements shifting limitations to tax-exempt and government entities.
Membership dues for any club organized for business, pleasure, recreation or other social purposes Non-deductible. Substantially similar provisions
Any de minimis fringe benefit that is primarily personal in nature and involving property or services that are not directly related to the taxpayer’s trade or business No provision, but de minimis food and beverages provided outside of an employer-operated eating facility are subject to 50% deduction limitation. Non-deductible in House bill.
Meals provided for the convenience of the employer or through an employer-operated eating facility that qualified as a de minimis fringe benefit Limited to 50% and then non-deductible after 2025. Non-deductible if de minimis in House bill.
Qualified transportation fringe benefits Non-deductible except for safety of employee. Non-deductible with no exception in House bill.
On-premises athletic facilities No provision.  Non-deductible in the House bill.
Fringe Benefits That Are Taxable
Adoption assistance No provision. Repeals exclusion in House bill.
Archer MSAs No provision. Employer contributions not deductible in House bill.
Bicycle commuting reimbursements Temporarily repeal exclusion beginning 2018 through Dec. 31, 2025. No provision in House bill.
Dependent care assistance No provision. Repeal of exclusion beginning 2023 in House bill.
Educational assistance for tax exempts under section 117(d) No provision. Repeal of exclusion in House bill.
Employee achievement awards Repeals exclusion from gross income when there are gift cards, vacations, meals, lodging, tickets to theater or sporting events, stocks, bonds, other securities, or other similar items awarded. House bill repealed deduction limitation and also repealed the exclusion from gross income.  
Moving expenses Repeals exclusion and generally suspends the individual deduction for 2018 through 2025. House bill is similar with no sunset.
Employer-provided housing No provision. House bill limited the exclusion to $50,000 annually ($25,000 for married individuals filing separate) subject to phase-out.
Alternative Minimum Tax (AMT) Boost to Incentive Stock Options Retains individual AMT but increases the exemption amounts and phase-out thresholds. Conference similar to Senate.  House bill repealed.
Retirement Savings

Repeals special rule allowing Roth IRA contributions to be recharacterized as traditional IRA contributions.

More flexibility regarding hardship distributions.

Extension of plan loan offset rollover periods. 

House bill eliminated the requirement that individuals take all available plan loans prior to hardship distribution, as well as other rules providing flexibility for such distributions.

House bill provided nondiscrimination testing relief to closed defined benefit plans that meet specified conditions and plan sponsors could elect to apply to plan years beginning after Dec. 31, 2013.

House bill would have allowed in-service distributions at age 59½ (down from age 62) in defined benefit plans and state and local government plans.

Excise Tax on Tax-Exempt Compensation

An annual 21% excise tax on the total taxable compensation provided by a tax-exempt organization to one of its five highest compensated employees, to the extent that the total exceeds $1 million. This would include any employee who was one of the five highest paid employees in any previous year after 2016. The employer would be liable to pay the tax. All related organizations would be aggregated for the purpose of determining whether the $1 million threshold is exceeded. 

In addition, the 21% excise tax separately would apply to any “excess parachute payment” with rules similar to section 280G.

Substantially similar provisions in bills.

KPMG NOTE

If enacted, provisions in the TCJA would represent the most comprehensive reform to the U.S. tax code in over 30 years and would have a dramatic impact on common compensation arrangements.  

The proposed changes to compensation arrangements and deductions would cause a reevaluation of an organization’s existing and planned compensation arrangements. Employers should be prepared to review their deferred compensation and other benefit arrangements in light of these proposed changes. 

Affected employers, in consultation with their tax advisers, should consider how the proposals may impact existing arrangements and formulate a forward-thinking holistic approach to benchmarking, compensation and benefits design, that takes into account the tax ramifications of this legislation with a view to remaining competitive in the marketplace.

FOOTNOTE

1  For discussion and analysis of the recent House-Senate conference agreement on the TCJA, see GMS Flash Alert 2017-185 (December 16, 2017).

For a comparison of the compensation and benefits measures in the U.S. House and Senate versions of the tax reform bills, see GMS Flash Alert 2017-178 (December 5, 2017).

For discussion of the Senate bill, see GMS Flash Alert 2017-177 (December 3, 2017).

For prior coverage of earlier versions of the bills, see GMS Flash Alert 2017-169 (November 17, 2017).

For discussion of the Chairman’s mark, see the following issues of GMS Flash Alerts 2017-164 (November 10, 2017) and 2017-165 (November 13, 2017). 

For the House bill, see the following issues of GMS Flash Alerts 2017-157 (November 2, 2017), 2017-161 (November 7, 2017), and 2017-162 (November 9, 2017).

The above information is not intended to be "written advice concerning one or more Federal tax matters" subject to the requirements of section 10.37(a)(2) of Treasury Department Circular 230 as the content of this document is issued for general informational purposes only.

The information contained in this newsletter was submitted by the KPMG International member firm in the United States. 

© 2018 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.KPMG International Cooperative (“KPMG International”) is a Swiss entity.

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Flash Alert is an Global Mobility Services publication of KPMG LLPs Washington National Tax practice. The KPMG logo and name are trademarks of KPMG International. KPMG International is a Swiss cooperative that serves as a coordinating entity for a network of independent member firms. KPMG International provides no audit or other client services. Such services are provided solely by member firms in their respective geographic areas. KPMG International and its member firms are legally distinct and separate entities. They are not and nothing contained herein shall be construed to place these entities in the relationship of parents, subsidiaries, agents, partners, or joint venturers. No member firm has any authority (actual, apparent, implied or otherwise) to obligate or bind KPMG International or any member firm in any manner whatsoever. The information contained in herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.

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