Analysis of the Final Tax Reform Bill – Part II: Changes to Deductions and Exclusions for Employee Meals and Other Fringe Benefits, Changes to Private Retirement Plan Benefits, and New Paid Leave Credit

On December 15, the House-Senate Conference Committee released the joint explanatory statement and final legislative text (the “Final Bill”) resolving differences between the House- and Senate-passed versions of the Tax Cuts and Jobs Act (the “House Bill” and “Senate Bill,” respectively).  The provisions of the Final Bill related to health reform, equity and executive compensation, deductions and exclusions for employee meals and other fringe benefits, private retirement plan benefit, paid leave, and various reporting, withholding, and income sourcing rules, largely track the bill passed by the Senate.  Many of the changes included in the House Bill but not the Senate Bill were dropped from the Final Bill. (Our earlier coverage of the House and Senate bills can be seen in a series of posts here.)

This post is the second in a series of three posts analyzing provisions of the Senate Bill. (Part I analyzes the elimination of the penalty for failing to maintain minimum essential coverage under the ACA and changes to equity and executive compensation.  Part III analyzes new reporting and withholding requirements and source rules.)  This post analyzes the following changes:

  • Fringe Benefits– The Final Bill will eliminate the deduction for entertainment expenses; eliminate the deduction (after 2025) for meals provided for the employer’s convenience (that are not occasional overtime meals) and meals provided at employer-operated eating facilities; impose a 50-percent limitation on deductions for occasional overtime meals and other de minimis meals; eliminate the deduction for amounts excluded from an employee’s income as qualified transportation fringes; eliminate the deduction for commuting expenses (except for the employee’s safety); suspend the exclusion for qualified bicycle commuting reimbursement; suspend the exclusion for qualified moving expense reimbursement; and prohibit the use of cash or gift cards and other non-tangible personal property as employee achievement awards.  The Final Bill does not include the following provisions that were included in the House Bill: the disallowance of deductions for de minimis fringe benefits that are primarily personal in nature and not related to the employer’s trade or business; the disallowance of deductions for expenses related to on-site athletic facilities; the application to all employees of the deduction disallowance for specified individuals for the deduction of entertainment expenses treated as compensation in excess of the amount included in income; the elimination of the exclusion for employer-provided tuition assistance and qualified tuition reductions; the elimination of the exclusion for adoption assistance programs; the elimination of the exclusion for dependent care assistance; and the elimination of the exclusion for employee achievement awards.
  • Private Retirement Benefits– The Final Bill will extend the rollover time period of certain outstanding plan loan offsets treated as a distribution from a qualified retirement plan, a section 403(b) plan, or a section 457(b) plan solely on account of the termination of the plan or the failure to meet the repayment terms of the loan due to severance from employment.  The Final Bill will also waive the 10‑percent early withdrawal tax on distributions of up to $100,000 to an individual whose principal place of abode at any time during 2016 was located in a “2016 disaster area” as declared by the President, and who suffered economic loss due to the storm, flooding, or other disaster that occurred in the area during 2016; allows for the ratable inclusion in income of such distributions over a three-year period; and permits the repayment of such distributions into an eligible retirement plan during 2018.
  • Employer Tax Credits– The Final Bill includes the Senate Bill provision that would provide employer tax credits in 2018 and 2019 for paid family and medical leave.  The Final Bill does not adopt the changes included in the House Bill to the credits under Code section 42F for employer provided child care and Code section 45B for the employer share of Social Security taxes on certain employee tip income.  The Final Bill also does not change the Work Opportunity Tax Credit under Code section 51.

These changes generally would be effective after 2017, except as otherwise noted below.

Fringe Benefits

Elimination of Deduction for Entertainment Expenses.  The Final Bill tracks the language of the Senate Bill and will completely disallow employer deductions for (1) entertainment, amusement, or recreation (“entertainment expenses”); (2) membership dues for clubs organized for business, pleasure, recreation or other social purposes; and (3) facilities used in connection with any of these items.  This full disallowance would replace the existing 50‑percent limit for entertainment expenses directly related to the active conduct of the employer’s trade or business.  The Final Bill does not include a provision from the House Bill that would have limited the exception for entertainment expenses treated as compensation to (or included in the gross income of) the recipient to the amount actually treated as compensation (or included in gross income of) the recipient as it is with employees that are “specified individuals” under current law.  (See earlier coverage.)

The Final Bill also does not impose a separate deduction limitation on “amenities,” which the House Bill defined as de minimis fringe benefits that are primarily personal in nature and that involve property or services not directly related to the taxpayer’s business.  (See earlier coverage.)

50-Percent Limitation on Deductions for Occasional Overtime Meals and Other De Minimis Meals. Currently, employers may generally deduct and employees may exclude from income meals that constitute de minimis fringe benefits under Code section 132(e).  De minimis meals may include occasional overtime meals, cocktail parties, group meals, and picnics for employees and their guests, and year-end holiday parties, in addition to meals provided at employer‑operated eating facilities.  Section 13304(b) of the Final Bill will generally impose a 50‑percent limitation on deductions for de minimis meals starting in 2018.  However, as described below, starting in 2026, employers would not be permitted to deduct any expenses for operating and providing meals through employer‑operated eating facilities (except to the extent the employees pay for the meals).  But, other types of de minimis meals would continue to be deductible, subject to the 50‑percent limitation.

Elimination of Deduction for Meals Provided for Employer’s Convenience (that are not Occasional Overtime Meals) and Employer-Operated Eating Facilities After 2025. Under existing law, employers may generally deduct (1) 50 percent of expenses for meals provided for the employer’s convenience under Code section 119; and (2) all expenses for the operation of and meals provided through an employer-operated eating facility that constitute de minimis fringe benefits under Treasury Regulation § 1.132-7 (but as described below, a 50-percent limitation would apply starting in 2018).  The Final Bill repeals these deductions effective in 2026.  After the repeal, if an employer chooses to provide meals to employees under section 119 or through an employer-operated eating facility, these meals would remain excludable from employees’ income and wages to the extent currently excludable under section 132, but the cost of providing them would not be deductible by the employer (except to the extent employees pay for the meals). The Senate Bill would not change the existing 50-percent deduction for other meal expenses associated with operating the employer’s trade or business (e.g., meals consumed by employees on work-related travel).

Elimination of Deduction for Qualified Transportation Fringes Excluded From Income.   Section 13304(c) of the Final Bill would disallow the deduction for providing any qualified transportation fringe benefits.  Under Code section 132(f), qualified transportation fringe benefits permit employers to either pay for an employee’s public transportation, van pool, bicycle, or parking expenses related to commuting on a pre-tax basis or allow employees to elect to receive a portion of their compensation in the form of non-taxable commuting benefits.  The Final Bill also clarifies that the deduction for qualified bicycle commuting reimbursement would be preserved from 2018 through 2025 (since the corresponding exclusion would be suspended during this period, as discussed below).

Elimination of Deduction for other Commuting Expenses (Except for Employee’s Safety).  Section 13304(c) of the Final Bill includes the Senate proposal that will disallow deductions for providing transportation (or any payment or reimbursement for related expenses) for commuting between an employee’s residence and the place of employment, except as necessary to ensure the employee’s safety.  Although it is unclear how the IRS would interpret the provision, the Final Bill could be read to disallow a deduction for transportation between an employee’s home and a temporary place of employment, which are currently fully deductible and excludable by the employee.  Ultimately, the effect of this change will depend upon how broadly the IRS interprets “place of employment,” which could be interpreted to include even temporary work locations away from an employee’s tax home.

Suspension of Exclusion for Qualified Bicycle Commuting Reimbursement.  As in the Senate Bill, section 11048 of the Final Bill would repeal the exclusion under Code section 132(f) for bicycle commuting expenses, making such benefits taxable to employees from 2018 through 2025.

Suspension of Exclusion for Qualified Moving Expense Reimbursement.  As expected, section 11048 of the Final Bill would largely suspend the exclusion from income and wages for a qualified moving expense reimbursement, which is employer-paid relocation assistance equal to the moving expenses that would have been deductible by the employee if he or she directly paid or incurred the cost.  As a result, employers who provide relocation assistance will either have to gross-up the amounts that would have been previously deductible or leave employees to pay more of the cost out-of-pocket.  The Final Bill would retain a narrow exclusion for members of U.S. Armed Forces on active duty who move pursuant to military orders.  In contrast to the permanent elimination in the House Bill, these changes would be effective from 2018 through 2025, as in the Senate Bill.

Prohibition on Use of Cash or Gift Cards and Other Non-Tangible Personal Property as Employee Achievement Awards.  The Final Bill retains the exclusion and deduction limitation for employee achievement awards but codifies proposed regulations defining “tangible personal property” for purposes of employee achievement awards.  Under Code sections 74(c)(1) and 274(j), employee achievement awards are excludable from income and deductible by the employer.  The House Bill would have eliminated the exclusion for employee achievement awards.

An “employee achievement award” is as an item of “tangible personal property” that meets certain other requirements without defining this term.  Treasury Regulations specify that tangible personal property does not include cash or any gift certificate other than a nonnegotiable gift certificate conferring only the right to receive tangible personal property.  In proposed regulations, the IRS provided a more comprehensive list of items that do not constitute tangible personal property, but these regulations were never issued in final form.  Section 13310 of the Final Bill would generally codify the list in the proposed regulations, to make clear that the following items do not constitute tangible personal property: (a) cash, cash equivalents, gift cards, gift coupons, or gift certificates (other than certificates conferring only the right to select and receive tangible personal property from a limited array of pre-selected items); (b) vacations, meals, lodging, tickets to theater or sporting events; and (c) stocks, bonds, other securities, and other similar items.

The restriction on gift certificates appears more restrictive than the current language of Treasury Regulation § 1.274-3(b) and the proposed regulations, which would permit employee achievement awards that are nonnegotiable gift certificates that provide only the right to receive tangible personal property.  The requirement that the employee be permitted to choose from a limited array of pre-selected items would appear to bless many common employee achievement programs, but is still more restrictive than existing law and the proposed regulations.  The Conference Summary stated, however, that “[n]o inference is intended that this is a change from present law and guidance.”

Private Employer Retirement Benefits

Extension of Time Period for Rollover of Certain Outstanding Plan Loans.  Under Code section 402(c)(3), a participant whose plan or employment terminates while he or she has an outstanding plan loan balance generally must contribute the loan balance to an individual retirement account (IRA) within 60 days of receiving an offset distribution.  Otherwise, the loan is treated as an impermissible early withdrawal and is subject to the 10‑percent early withdrawal penalty.  Like the Senate Bill and similar to the House Bill, section 13613 of the Final Bill would relax these rules by adding a new section 402(c)(3)(C) to give these employees until the due date for their individual tax return to contribute the outstanding loan balance to an IRA.  This new rule would only apply to loan offset amounts treated as distributed solely by reason of the termination of the plan or the failure to repay the loan because of the employee’s severance from employment.  The 10‑percent penalty would only apply after that date.

Qualified 2016 Disaster Distribution (for 2016 and 2017).  Like the Senate Bill, the Final Bill would provide disaster relief.  Section 11028 of the Final Bill, would waive the 10‑percent early withdrawal tax on distributions of up to $100,000 to an individual whose principal place of abode at any time during 2016 or 2017 was located in a “2016 disaster area” as declared by the President, and who suffered economic loss due to the storm, flooding, or other disaster that occurred in the area during 2016.  This relief is broader than that contained in the Senate Finance Committee language, which provided relief only to flooding and storm victims in the “Mississippi River Delta flood disaster area” during March 2016 (earlier coverage).  The distribution must be made during 2016 or 2017 to be exempt from the early withdrawal tax.  Additionally, any distribution required to be included in income as a result of this special distribution rule is included in income ratably over a three-year period, beginning with the year of distribution.  During this three-year period, amounts received may be re‑contributed to the plan and treated as a rollover, thus allowing the individual to file an amended return.  (For more information regarding special tax relief for victims of natural disasters, see our discussions of: (1) leave-based donation programs, leave-sharing programs, and relaxed plan loans and hardship withdrawal rules for victims of Hurricane Harvey and Irma; and (2) qualified disaster relief payments under Code section 139.)

Employer Tax Credits

Employer Tax Credit for Paid FMLA Leave for 2018 and 2019.  Section 13403 of the Final Bill includes a new section of the Code that will allow eligible employers to claim a general business credit equal to 12.5 percent of wages paid to a qualifying employee while on FMLA leave, plus 0.25 percent of wages (capped at 25 percent) for each percentage point by which the FMLA pay exceeds 50 percent of the employee’s normal pay.  An “eligible employer” is one that institutes a FMLA‑leave policy that: (a) allows all qualifying full-time employees not less than two weeks of annual paid family and medical leave (not counting leave paid by State or local government); (b) allows less-than-full-time employees a commensurate amount of leave on a pro rata basis; and (c) provide leave pay at a rate that is at least 50 percent of the employee’s normal pay.  A “qualifying employee” is an employee under the Fair Labor Standards Act who has been employed by the employer for at least one year, and whose preceding‑year compensation did not exceed 60 percent of the compensation threshold for highly compensated employees ($120,000 for 2017).  The Final Bill specified that the policy must be put in writing.

For each employee, the credit that the employer may claim is limited to 12 weeks of paid FMLA leave (including paid family and medical leave provided to qualifying employees that are not covered by Title I of the FMLA, provided the employer does not interfere with rights provided under the policy and does not discharge or discriminate against any individual for opposing practices prohibited by the policy).  Moreover, the employer may not deduct any portion of wages for which the employer claims the credit, but the employer can elect not to have the credit apply and deduct the paid leave instead.  Finally, as the credit is part of a pilot program, the credit would only be available in 2018 and 2019.

Analysis of the Senate Tax Reform Bill – Part II: Changes to Deductions and Exclusions for Employee Meals and Other Fringe Benefits, Changes to Private Retirement Plan Benefits, and New Paid Leave Credit

Early Saturday morning, the Senate voted 51-49 to approve a modified version of the Tax Cuts and Jobs Act (the “Senate Bill”). The Senate Bill differs from the House bill (discussed in an earlier series of posts here) passed last month in several respects, and a final negotiated bill will need to pass both chambers before the President can sign it into law. Given the difficulty of moving legislation through the Senate, it seems likely that any enacted legislation would likely be similar to the version passed by the Senate.

This post is the second in a series of three posts analyzing provisions of the Senate Bill. (Part I analyzes the elimination of the penalty for failing to maintain minimum essential coverage under the ACA and changes to equity and executive compensation. Part III analyzes new reporting and withholding requirements and source rules.)  This post analyzes the following changes:

  • Fringe Benefits – (a) eliminate the deduction for entertainment expenses; (b) eliminate the deduction (after 2025) for meals provided for the employer’s convenience (that are not occasional overtime meals) and meals provided at employer-operated eating facilities; (c) impose a 50-percent limitation on deductions for occasional overtime meals and other de minimis meals; (d) eliminate the deduction for qualified transportation fringes; (e) eliminate the deduction for commuting expenses (except for the employee’s safety); (f) suspend the exclusion for qualified bicycle commuting reimbursement; (g) suspend the exclusion for qualified moving expense reimbursement; and (h) prohibit the use of cash or gift cards and other non-tangible personal property as employee achievement awards.
  • Private Retirement Benefits – (a) extend the rollover time period of certain outstanding plan loans; and (b) allow qualified distributions for victims of major disasters in 2016.
  • Employer Tax Credits – provide employer tax credits in 2018 and 2019 for paid family and medical leave.

These changes generally would be effective after 2017, except as otherwise noted below.

Fringe Benefits

Elimination of Deduction for Entertainment Expenses. Similar to the House bill, section 13304(a) of the Senate Bill would completely disallow employer deductions for (1) entertainment, amusement, or recreation (“entertainment expenses”); (2) membership dues for clubs organized for business, pleasure, recreation or other social purposes; and (3) facilities used in connection with any of these items.  This full disallowance would replace the existing 50‑percent limit for entertainment expenses directly related to the active conduct of the employer’s trade or business.

Unlike the House bill, however, the Senate Bill would not impose a separate deduction limitation on “amenities,” which the House bill defined as de minimis fringe benefits that are primarily personal in nature and that involve property or services not directly related to the taxpayer’s business. (See earlier coverage.) The Senate Bill would continue to permit deductions for such expenses to the extent currently permitted by law (as modified by the provisions relating to employer meals discussed below).

Elimination of Deduction for Meals Provided for Employer’s Convenience (that are not Occasional Overtime Meals) and Employer-Operated Eating Facilities After 2025. Under existing law, employers may generally deduct (1) 50 percent of expenses for meals provided for the employer’s convenience under Code section 119; and (2) all expenses for the operation of and meals provided through an employer-operated eating facility that constitute de minimis fringe benefits under Treasury Regulation § 1.132-7 (but as described below, a 50‑percent limitation would apply starting in 2018). These deductions would be repealed under section 13304(d) of the Senate Bill, effective after 2025. After the repeal, if an employer chooses to provide meals to employees under section 119 or through an employer‑operated eating facility, these meals would remain excludable from employees’ income and wages to the extent currently excludable under section 132, but the cost of providing them would not be deductible by the employer (except to the extent employees pay for the meals). The Senate Bill would not change the existing 50‑percent deduction for other meal expenses associated with operating the employer’s trade or business (e.g., meals consumed by employees on work-related travel).

The Senate Bill’s restrictive approach to meal deductions differs from the House bill’s approach of allowing full deductions for meals provide at employer‑operated eating facilities, meals provided for the employer’s convenience under section 119, and meals that otherwise qualify as de minimis fringe benefits, such as occasional overtime meals. Moreover, the Senate Bill’s deferred repeal at the end of the 10‑year budget window suggests that the repeal may have been part of an effort to ensure compliance with Senate reconciliation rules requiring that the Bill not increase the deficit outside of the budget window.

50-Percent Limitation on Deductions for Occasional Overtime Meals and Other De Minimis Meals. Currently, employers may generally deduct and employees may exclude from income meals that constitute de minimis fringe benefits under Code section 132(e). De minimis meals may include occasional overtime meals, cocktail parties, group meals, and picnics for employees and their guests, and year-end holiday parties, in addition to meals provided at employer‑operated eating facilities. Section 13304(b) of the Senate Bill would generally impose a 50‑percent limitation on deductions for de minimis meals starting in 2018. As described above, starting in 2026, employers would not be permitted to deduct any expenses for operating and providing meals through employer‑operated eating facilities (except to the extent the employees pay for the meals). But the other types of de minimis meals would continue to be deductible subject to the 50‑percent limitation.

Elimination of Deduction for Qualified Transportation Fringes. Like the House bill, section 13304(c) of the Senate Bill would disallow the deduction for providing any qualified transportation fringe benefits.  Under Code section 132(f), these fringe benefits permit employers to either pay for an employee’s public transportation, van pool, bicycle, or parking expenses related to commuting on a pre-tax basis or allow employees to elect to receive a portion of their compensation in the form of non-taxable commuting benefits. Although the Senate Bill does not change the existing income exclusion for commuting expenses (other than bicycle commuting expenses, discussed below) that constitutes de minimis fringe benefits, it would likely discourage employers from providing qualified transportation benefits to employees.

Elimination of Deduction for other Commuting Expenses (Except for Employee’s Safety). Unlike the House bill, section 13304(c) of the Senate Bill would further disallow deductions for providing transportation (or any payment or reimbursement for related expense) for commuting between an employee’s residence and the place of employment, except as necessary to ensure the employee’s safety. This deduction disallowance would appear to apply even to commuting benefits that are treated as taxable compensation to the employee. Although it is unclear how the IRS would interpret the provision, the Senate Bill could be read to disallow a deduction for transportation between an employee’s home and a temporary place of employment, which are currently fully deductible and excludable by the employee. Ultimately, the effect of this change will depend upon how broadly the IRS interprets “place of employment,” which could be interpreted to include even temporary work locations away from an employee’s tax home.

Suspension of Exclusion for Qualified Bicycle Commuting Reimbursement. Unlike the House bill, section 11048 of the Senate Bill would repeal the exclusion under Code section 132(f) for bicycle commuting expenses, making such benefits taxable to employees from 2018 through 2025.

Suspension of Exclusion for Qualified Moving Expense Reimbursement. Similar to the House bill, section 11049 of the Senate Bill would partially suspend the 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.  The Bill would retain a narrow exclusion for members of U.S. Armed Forces on active duty who move pursuant to military orders. These changes would be effective from 2018 through 2025.

Prohibition on Use of Cash or Gift Cards and Other Non-Tangible Personal Property as Employee Achievement Awards.  Whereas the House bill would eliminate the exclusion and deduction limitation for employee achievement awards, section 13311 of the Senate Bill would retain the exclusion and deduction limitation but codify proposed regulations defining “tangible personal property” for purposes of employee achievement awards.  Under Code sections 74(c)(1) and 274(j), employee achievement awards are excludable from income and deductible by the employer.  Section 274(j)(3)(A) defines an “employee achievement award” as an item of “tangible personal property” that meets certain other requirements without defining this term.  Under Treasury Regulation § 1.274-3(b), tangible personal property does not include cash or any gift certificate other than a nonnegotiable gift certificate conferring only the right to receive tangible personal property.  Under Proposed Regulation § 1.274-8(c)(2), the IRS provided a more comprehensive list of items that do not constitute tangible personal property, but these regulations were never issued in final form.

The Senate Bill would basically codify the list in the proposed regulations, to make clear that the following items do not constitute tangible personal property: (a) cash, cash equivalents, gift cards, gift coupons, or gift certificates (other than certificates conferring only the right to select and receive tangible personal property from a limited array of pre-selected items); (b) vacations, meals, lodging, tickets to theater or sporting events; and (c) stocks, bonds, other securities, and other similar items.  The restriction on gift certificates is more restrictive than the current language of Treasury Regulation § 1.274-3(b) and the proposed regulations, which would permit employee achievement awards that are nonnegotiable gift certificates that provide only the right to receive tangible personal property.  The requirement that the employee be permitted to choose from a limited array of pre-selected items would appear to bless many common employee achievement programs, but is still more restrictive than existing law and the proposed regulations.

Private Employer Retirement Benefits

Extension of Time Period for Rollover of Certain Outstanding Plan Loans.  Under Code section 402(c)(3), a participant whose plan or employment terminates while he or she has an outstanding plan loan balance generally must contribute the loan balance to an individual retirement account (IRA) within 60 days of receiving an offset distribution.  Otherwise, the loan is treated as an impermissible early withdrawal and is subject to the 10‑percent early withdrawal penalty.  Like the House bill, section 13613 of the Senate Bill would relax these rules by adding a new section 402(c)(3)(B) to give these employees until the due date for their individual tax return to contribute the outstanding loan balance to an IRA.  The 10‑percent penalty would only apply after that date.

Qualified 2016 Disaster Distribution (for 2016 and 2017). Unlike the House bill, the Senate Bill would provide additional disaster relief.  Section 11029 of the Senate Bill, would waive the 10‑percent early withdrawal tax on distributions of up to $100,000 to an individual whose principal place of abode at any time during 2016 or 2017 was located in a “2016 disaster area” as declared by the President, and who suffered economic loss due to the storm, flooding, or other disaster that occurred in the area during 2016.  This relief is broader than that contained in the Senate Finance Committee language, which provided relief only to flooding and storm victims in the “Mississippi River Delta flood disaster area” during March 2016 (earlier coverage). The distribution must be made during 2016 or 2017 to be exempt from the early withdrawal tax.  Additionally, any distribution required to be included in income as a result of this special distribution rule is included in income ratably over a three-year period, beginning with the year of distribution.  During this three-year period, amounts received may be re‑contributed to the plan and treated as a rollover, thus allowing the individual to file an amended return.  (For more information regarding special tax relief for victims of natural disasters, see our discussions of: (1) leave-based donation programs, leave-sharing programs, and relaxed plan loans and hardship withdrawal rules for victims of Hurricane Harvey and Irma; and (2) qualified disaster relief payments under Code section 139.)

Employer Tax Credits

Employer Tax Credit for Paid FMLA Leave for 2018 and 2019.  Section 13403 of the Senate Bill would allow eligible employers to claim a general business credit equal to 12.5 percent of wages paid to a qualifying employee while on FMLA leave, plus 0.25 percent of wages (capped at 25 percent) for each percentage point by which the FMLA pay exceeds 50 percent of the employee’s normal pay.   An “eligible employer” is one that institutes a FMLA‑leave policy that: (a) allows all qualifying full-time employees not less than two weeks of annual paid family and medical leave (not counting leave paid by State or local government); (b) allows less-than-full-time employees a commensurate amount of leave on a pro rata basis; and (c) provide leave pay at a rate that is at least 50 percent of the employee’s normal pay. A “qualifying employee” is an employee under the Fair Labor Standards Act who has been employed by the employer for at least one year, and whose preceding‑year compensation did not exceed 60 percent of the compensation threshold for highly compensated employees ($120,000 for 2017).

The Senate Bill would also allow eligible employers to take this credit for paid family and medical leave provided to qualifying employees that are not covered by Title I of the FMLA, provided the employer will not interfere with rights provided under the policy and will not discharge or discriminate against any individual for opposing practices prohibited by the policy. This is a change from the credit as proposed in the Senate Finance Committee language (earlier coverage).

For each employee, the credit that the employer may claim is limited to 12 weeks of paid FMLA leave. Moreover, the employer may not deduct any portion of wages for which the employer claims the credit, but the employer can elect not to have the credit apply and deduct the paid leave instead. Finally, as the credit is part of a pilot program, the credit would only be available in 2018 and 2019.

Tax Relief for Leave-Based Donation Programs and Qualified Plan Distribution Extended to Hurricane Irma Victims

The IRS recently announced favorable tax relief for “leave-based donation programs” designed to aid victims of Hurricane Irma, as well as easier access to funds in qualified retirement plans for these victims.  These forms of relief were provided to victims of Hurricane Harvey last month (see prior coverage), and as expected, were promptly extended to victims of Hurricane Irma.

Specifically, under Notice 2017-52, employees may forgo paid vacation, sick, or personal leave in exchange for cash donation the employer makes, before January 1, 2019, to charitable organization providing relief for the Hurricane Irma victims.  The IRS will not treat the donated leave as income or wages to the employee, and will permit employers to deduct the donations as business expenses.  Similarly, in Announcement 2017-13, the IRS extended to employees affected by Hurricane Irma the relaxed distribution rules announced following Hurricane Harvey for plan loans and hardship distributions from qualified retirement plans.  The relief generally permits plan sponsors to adopt amendments permitting plan loans and hardship withdrawals later than would otherwise be required to provide such options, waives the six-month suspension of contributions for hardship withdrawals, and allows the disbursement of hardship withdrawals and plan loans before certain procedural requirements are satisfied.

As we discussed with respect to Hurricane Harvey, employers looking to provide further relief to their employees have other long-standing options, as well.  For example, Notice 2006-59 provides favorable tax treatment similar to that provided under Notice 2017-52 for “leave-sharing plans” that permit employees to deposit leave in an employer-sponsored leave bank for use by other employees who have been harmed by a major disaster.  Additionally, section 139 permits individuals to exclude from gross income and wages any “qualified disaster relief payment” for reasonable and necessary personal, family, living, or funeral expenses, among others; and the payments may be made through company-sponsored private foundations (see our recent Client Alert on section 139 disaster relief payments).

Hurricane Harvey Prompts IRS to Provide Tax Relief for Leave-Based Donation Programs

The IRS recently released Notice 2017-48, providing favorable tax relief for “leave-based donation programs” designed to aid victims of Hurricane Harvey.  Under these programs, employees may elect to forgo vacation, sick, or personal leave in exchange for payments that the employer makes to charitable organizations described under section 170(c).  Under this notice, payments employees elect to forgo do not constitute income or wages of the employees for federal income and employment tax purposes if the employer makes the payments, before January 1, 2019, to charitable organizations for the relief of victims of Hurricane Harvey.  The IRS will not assert that an opportunity to make this election results in employees’ constructive receipt of the payments.  Thus, the employer would not need to include the payments in Box 1, 3 (if applicable), or 5 of the Forms W-2 for employees electing to forgo their vacation, sick, or personal leave.

With respect to employer deductions, the IRS will not assert that an employer is permitted to deduct these cash payments exclusively under the rules of section 170, applicable to deductions for charitable contributions, rather than the rules of section 162.  Accordingly, the deduction will not be limited by the percentage limitation under section 170(b)(2)(A) or subject to the procedural requirements of section 170(a).  Thus, payments made to charitable organizations pursuant to leave-based donation programs are deductible to the extent the payments would be deductible under section 162 if paid to the employees (i.e., the payments would have constituted reasonable compensation and met certain other requirements).

The requirements of Notice 2017-48 are straightforward, but if an employer fails to comply, the general tax doctrines of assignment of income and constructive receipt would apply.  Under these doctrines, if an employee can choose between receiving compensation or assigning the right to that compensation to someone else, the employee has constructive receipt of the compensation even though he or she never actually receives it.  (These concepts also create difficulties for paid-time off programs under which employees can choose to use PTO or receive cash.)  Thus, without special tax relief, an employee who assigns the right to compensation to a charitable organization would be taxed on that compensation, and the employer would have corresponding income and employment tax withholding and reporting obligations.  Although the employee would be entitled to take an itemized deduction for charitable contributions in that amount, this below-the-line deduction only affects income taxes (and not FICA taxes), and would not fully offset the amount of the income for non-itemizers who claim the standard deduction ($6,300 for single filers in 2016).

The devastation caused by Hurricane Harvey and the impending threat of Hurricane Irma, which is currently affecting islands in the Eastern Caribbean islands, have renewed interest in favorable charitable contribution tax rules that extend beyond the parameters of section 170.  Apart from Notice 2017-48, the IRS has also previously provided certain special tax treatment for disaster relief payments employers provide to their employees.  On August 30, the IRS provided for easier access to funds in qualified retirement plans in IRS Announcement 2017-11.  The rules generally permit plan sponsors to adopt amendments permitting plan loans and hardship withdrawals later than would otherwise be required to provide such options, waive the six-month suspension of contributions for hardship withdrawals, and allow the disbursement of hardship withdrawals and plan loans before certain procedural requirements are satisfied.  Although the relief provided in Announcement 2017-11 applies only to those affected by Hurricane Harvey (and Notice 2017-48 applies only to charitable contributions designed to aid such individuals), it is likely the IRS will provide similar relief to those affected by Hurricane Irma if it makes landfall in the United States, as appears likely at this time.

Employers looking to provide further relief to their employees have other long-standing options, as well.  For example, Notice 2006-59 provides favorable tax treatment similar to that provided under Notice 2017-48 for “leave-sharing plans” that permits employees to deposit leave in an employer-sponsored leave bank for use by other employees who have been harmed by a major disaster.  Additionally, section 139 permits individuals to exclude from gross income and wages any “qualified disaster relief payment” for reasonable and necessary personal, family, living, or funeral expenses, among others; and the payments may be made through company-sponsored private foundations (see our recent Client Alert on section 139 disaster relief payments).