President Trump has signed into law spending bills that will affect employers. Here's a brief summary of some of the changes.
"Cadillac Tax" Repealed:
The legislation repeals three Affordable Care Act (ACA) taxes, including the "Cadillac tax," the medical device tax, and the health insurance tax. The Cadillac tax was initially enacted as part of the ACA in 2010 and scheduled to take effect in 2022. It was intended to counter health-care cost increases by applying a 40 percent tax on employer health coverage costing over $11,200 a year for individuals and $30,150 for families.
Retirement Plan Provisions:
The legislation includes several changes designed to expand and facilitate retirement savings, such as an increased limit for automatic escalation of savings percentages from 10 percent to 15 percent, and provisions to encourage multiemployer plans. A few examples of the changes are outlined below.
Incentives:
The legislation provides new incentives for businesses to offer retirement plans, thereby reducing employers' administrative costs. Eligible small employers are entitled to an annual start-up tax credit for three years, previously capped at $500 annually. The legislation increases this cap to up to $5,000 annually for three years. Small employers that adopt automatic enrollment can also qualify for an additional $500 credit for three years. These expanded credits are available starting in 2020.
Disclosures:
Another provision requires employers to provide participants with an estimate of the annuity income that participant accounts could produce. The Department of Labor will provide detailed guidance and model disclosures, which will become part of participants' annual statements. Employers will have at least 12 months after guidance is published to provide the disclosures.
Expanded 401(k) Eligibility:
The legislation also requires employers to permit long-term part-time workers to participate in 401(k) plans, opening eligibility to employees that complete either 1,000 hours within one year or 500 hours in each of three consecutive years. However, employers are not required to provide matching contributions for employees who become eligible for the 401(k) plan under this rule. This provision is generally effective for plan years beginning after 2020.
Penalty-free Withdrawals:
Effective immediately, the legislation permits participants to take penalty-free withdrawals of up to $5,000 from a qualified retirement plan for expenses related to the birth or adoption of a child, for up to one year following such birth or adoption.
Required Minimum Distributions:
The legislation increases the age for required minimum distributions from age 70½ to 72, enabling certain workers and retirees to delay payouts from a retirement plan.
"Tax Extenders":
The legislation extends several tax credits of which either expired or which were scheduled to expire. The following tax credits are now renewed/extended through 2020:
· Indian Employment Credit (tax incentive for employing Native Americans who live and work on a reservation)
· Empowerment Zone Tax Incentives (tax incentive for hiring and retaining employees who live and work in a designated Empowerment Zone)
· Work Opportunity Tax Credit (tax incentive for hiring employees from certain marginalized groups).
Tax Credit for Paid Family and Medical Leave Extended:
Beginning in 2018, eligible employers were able to claim a general business tax credit equal to 12.5 percent of wages paid to qualifying employees during any period in which such employees are on paid family and medical leave, if the rate of payment under the program is at least 50 percent of the wages normally paid to an employee. The credit is increased by 0.25 percentage points (but not above 25 percent) for each percentage point by which the rate of payment exceeds 50 percent. For example:
· For an employee on family leave who is paid 60 percent of their normal wages, the credit would be 15 percent of the wage amount (12.5 percent plus (10 percent x 0.25 = 2.5 percent).
· An employee paid 100 percent of their normal wage amount would generate a credit equal to 25 percent of the wage amount (12.5 percent plus (50 percent x 0.25) = 25 percent).
The maximum amount of family and medical leave that may be taken into account with respect to any employee for any year is 12 weeks. If an employer provides paid leave as vacation leave, personal leave, or other medical or sick leave, this paid leave is not considered to be family and medical leave. Leave paid for or required by state or local laws do not qualify.
This tax credit was set to expire after 2019, but is now extended through 2020. For details, see IRS Notice 2018-71 and IRS FAQs.
Disaster Relief Provisions:
The Act provides for an Employee Retention Credit applicable to any disaster area declared after January 1, 2018 through February 18, 2020 (California Wildfire areas are excluded since relief provisions were previously enacted). The credit is 40 percent of wages up to $6,000 per employee for up to 150 days. The credit applies to employers that conducted business in a qualified disaster zone during the incident period and were inoperable for a time as a result of the disaster. The credit may apply to wages to employees who performed no services or performed services before significant operations resumed.
Compliance Recommendations:
Employers interested in the tax and other employer-related provisions of the recent spending bills should consult with appropriate legal and tax advisors for further details. Please contact your dedicated service professional with any questions.