Impact of Tax Cuts and Jobs Act: Part I – Exclusions for Certain Employer-Provided Benefits

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November 2, 2017

Today, the House Ways and Means Committee released the Tax Cuts and Jobs Act (H.R. 1) (the “Bill”), a bill that, if enacted, would represent the most substantial overhaul of the U.S. tax code in decades.  We will release a series of posts to highlight the provisions of the Bill affecting the topics pertinent to our readers, where each post will cover a different area of importance.  In the first of this series of posts, we will discuss the Bill’s potential impact on the exclusions for several popular employer-provided benefits.

Limitation on Exclusion for Employer-Provided Meals and Lodging. Under Code section 119 as currently written, the value of employer-provided housing is excludable from an employee’s gross income and is not considered to be wages for purposes of employer withholding.  Section 1401 of the Bill would add a new subsection (e) to Code section 119 to limit the income exclusion for employer-provided housing to $50,000 ($25,000 for a married individual filing a joint return), and that amount would phase out for highly compensated individuals.  Presumably, this change would obligate employers to report the fair market value of employer-provided housing on an employee’s Form W-2 even if excludable under Code section 119, and the employee would take the exclusion on his or her individual income tax return.  In addition, the exclusion would be limited to a single residence for all employees, and the exclusion would be altogether eliminated for 5 percent owners of the employer.

Elimination of Exclusion for Dependent Care Assistance Programs. Under Code section 129, the value of employer-provided dependent care assistance programs (“DCAP”) is generally excluded from an employee’s income and wages up to $5,000 per year.  Employees typically take advantage of this exclusion through a dependent care flexible spending account that is part of a cafeteria plan under Code section 125.  Section 1404 of the Bill would repeal this exclusion in its entirety. Note: This provision was eliminated from the bill by an amendment adopted by the Ways and Means Committee (discussed here).

Educational Assistance Programs and Qualified Tuition Reductions. Two benefits primarily focused on assisting employees with educational expenses would be eliminated by the Bill.  First, under Code section 127, amounts paid to or on behalf of an employee under a qualified educational assistance program are excluded from an employee’s income and wages up to $5,250 per year.  Section 1204 of the Bill would repeal this exclusion in its entirety.  Second, the exclusion from income and wages for qualified tuition reductions provided by educational institutions would also be repealed by Section 1204.  Though this change would affect fewer employers, it would eliminate an often-significant benefit for employees who work for educational institutions, as they would be taxed on the full amount of tuition waived for them or their spouses or dependents to attend the educational institution.

Elimination of Exclusion for Adoption Assistance Programs. Currently, Code section 137 provides an exclusion from an employee’s income and wages for amounts provided by an employer to an employee for amounts paid or expenses incurred for the adoption of a child up a certain amount that is indexed for inflation ($13,570 in 2017).  Section 1406 of the Bill would repeal the exclusion.

Elimination of Exclusion for Employer-Paid Moving Expenses. Code section 132(a)(6) provides an exclusion from income and wages for a qualified moving expense reimbursement, which is an employer-provided benefit capped at the amount deductible by the individual if he or she directly paid or incurred the cost.  Section 1405 of the Bill would repeal this exclusion.

Exclusion for Employee Achievement Awards. Code section 74(c) excludes the value of certain employee achievement awards given in recognition of an employee’s length of service or safety achievement from the employee’s income. Section 274(j) limits an employer’s deduction for employee achievement awards for any employee in any year to $1,600 for qualified plan awards and $400 otherwise. A qualified plan award is an employee achievement award that is part of an established written program of the employer, which does not discriminate in favor of highly compensated employees, and under which the average award (not counting those of nominal value) does not exceed $400.  The exclusion under Code section 74(c) is limited to the amount that the employer is permitted to deduct for the award.  Section 1403 of the Bill would repeal this exclusion and the corresponding deduction limitation.

All of these changes would be effective for tax years beginning after 2017.  In addition to the employer-provided benefits discussed in this post, the Bill would affect a number of other topics covered by this Blog, so stay tuned for Part II in the series.