Tax Reform Implications for Plan Sponsors and Fiduciaries
On December 22, 2017, President Trump signed the Tax Cut and Jobs Act, enacting sweeping tax reform which had been one of the centerpieces of his campaign platform. The implications are wide-ranging and we would not purport to try to summarize all of them here, but we thought we’d highlight a few points of interest to plan sponsors and plan fiduciaries.
As the law relates to retirement plans, perhaps the biggest news is that there is no big news. While rumors may have floated around at various times, there were no major changes to the tax law on qualified retirement plans. The tax status, deductibility and limits of retirement plan contributions remained unchanged.
The one retirement-related development is that the law repeals the ability to “recharacterize” (essentially, undo) a Roth conversion. Prior to the new law, an IRA owner was permitted to transfer conversion contributions that were made to a Roth IRA through a conversion from a traditional IRA back to a traditional IRA, effectively canceling the Roth conversion. This type of recharacterization was helpful for IRA owners whose situations changed after the conversion contributions were made. For example, an IRA owner might have decided to recharacterize Roth IRA conversion contributions when the Roth IRA assets declined in value after the conversion or the IRA owner did not have the funds to pay the taxes due on the conversion. This flexibility has been removed, but the IRS did clarify that conversions that occurred in 2017 could still be recharacterized in 2018 (but conversions in 2018 or after cannot be recharacterized).
The significant changes to the treatment of employee benefits arise in health benefits and fringe benefits.
- Significantly, and as part of the Trump administration’s announced intention to dismantle the Affordable Care Act, the new law removes the penalty for individuals who do not have qualifying health insurance (the so-called “individual mandate.”)
- Changes were made to the deductibility of employee transit benefits and the payment of employee moving costs. Neither can be deducted from corporate income tax any longer. Thus, employers may be re-evaluating their treatment of these benefits.
- Finally, achievement awards in the form of “tangible personal property” given to employees by employers (a) may not be excluded from the employee’s taxable income and (b) may not be deducted by the employer as a business expense. This would include bonuses or awards paid in the form of gift cards, travel, lodging or theater or sporting event tickets.
