Tax Reform: What Does it Mean for Employee Benefits?
The end of 2017 in Washington was focused on passing Tax Reform. The conference committee completed a long process to bring together separate bills passed by the Senate and the House into a single bill that was considered by both chambers. Along with a considerable reduction in the corporate tax rate and tax cuts for most individual taxpayers, the final bill signed by President Trump has several implications for employer-sponsored benefits programs as well as the individual insurance market.
Here is an outline of exactly what was (and wasn’t) included in the final version of the bill that will have implications for insurance carriers and employers.
What’s Not Changing
There were a number of provisions included in either the House or Senate version that would have impacted employer-sponsored benefits in a material way. However, these provisions were ultimately dropped from the final bill:
- Dependent Care FSAs: The final bill does not eliminate Dependent Care FSAs, nor does the bill change the pre-tax treatment of employee contributions to Dependent Care FSAs.
- Tuition Reduction & Education Assistance: The final bill does not treat employer-provided education assistance as taxable income; rather, this fringe benefit remains tax-free to employees and deductible to the employer.
- Adoption Assistance: Same as above.
- Medical Savings Accounts (MSAs): The final bill does not change the favorable tax treatment of Medical Savings Accounts. Note that Archer MSAs are legacy accounts that predate Health Savings Accounts (HSAs), and are very rare.
- HSAs, Health FSAs, and the Cadillac tax: Neither the House nor Senate versions of Tax Reform (nor the final bill) changed the tax treatment of HSAs or FSAs. The Cadillac tax was not addressed, and no changes were made to the tax treatment of employer and employee contributions for a health plan.
What Is Changing
The key changes to employer benefits that were included in the final version of the bill are noted below. These changes primarily impact fringe benefits that are less commonly offered, although may be important to some employers. In addition, the final bill reduces the individual mandate penalty tax to $0 – beginning Jan. 1, 2019 – which effectively means that the penalty tax will be inoperative, akin to repeal of the provision. This change in the law will have implications, both direct and indirect, on carriers and employers.
The final tax bill states that employers are no longer permitted to deduct contributions for their employees’ transit, parking and bicycle commuting expenses from their corporate income taxes. The reasoning behind the elimination of the deduction is that, since the tax bill substantially lowers the corporate tax rate, smaller employer tax breaks that complicate the tax code are no longer necessary.
Employers who offer commuter benefits will need to decide if providing them is critical to competing for top talent without the ability to deduct these amounts from their corporate taxes. In some geographic locations, the labor market may maintain demand for subsidization of commuter benefits to continue.
It’s important to note that employee salary reduction contributions to pay for transit and parking expenses remain tax-free. Employers may consider converting their employer-paid commuter benefits into taxable wages, continue to deduct these wages from their corporate income taxes, and allow their employee to make pre-tax payments for transit and parking expenses.
The final tax bill suspends the tax exclusion and deduction related to moving expenses. The value of the benefit will now be included as taxable income for the employee, and the deduction will be eliminated for individual taxpayers. However, moving expenses will remain tax-free for members of the military who are on active duty or who move pursuant to a military order.
Employers will have to decide how to handle the shift in tax treatment. Considering the value of funding moving expenses to bring in top talent, it’s likely that employers wouldn’t pass through this shift in tax treatment and would bear this cost themselves—meaning employers will face a higher cost for moving employees.
The final tax bill creates a new category related to employee achievement awards entitled ‘tangible personal property.’ Employees would not be able to exclude from taxable income and employers cannot characterize these awards as a business expense: cash, cash equivalents, gift cards, gift certificates, vacations, meals, lodging, or tickets to theater or sporting events.
Employers will have to determine how to handle their awards programs going forward, and if continued, employers will likely bear a greater cost for the awards, as they would likely not want to pass that cost on to the employees they are awarding.
ACA’s Individual Mandate Penalty Tax Reduced to $0
The final tax bill removes the tax penalty for individuals who do not have qualifying health insurance, effective 2019. This is doubly important for Republicans, who are not only working to fulfill a campaign promise, but will also use the savings from the repeal (CBO estimated at $318 billion) to help fund the middle-class tax cut. The CBO released an updated score for the impact of removing the tax penalty, and it came to the following conclusions:
- The government would save $318 billion over 10 years (from reduced premium subsidy spending and reduce Medicaid spending).
- Four million people would be uninsured in the first year and 13 million uninsured in 2027.
- The individual market would continue to be stable in almost all areas of the country throughout the coming decade.
- Premiums would go up by 10 percent in most years in the decade.
What’s important to call out from these conclusions is the shift in the CBO’s view on the impact. During prior CBO scores for removing the individual mandate as part of this summer’s health care reform efforts, the CBO indicated specifically that the removal of the individual mandate would ‘destabilize’ the individual market. However, now their assessment is more measured, indicating markets would remain ‘stable’.
While the CBO did not share specifics on the shift, it’s likely that there’s a change in belief that as long as the Advance Premium Tax Credit (APTC or ‘premium subsidy’) is available, it will be sufficient to drive enough enrollment to keep the risk pool sizable enough (8 – 10 million) that markets won’t destabilize, and even if the risk pool is imbalanced, the APTC will offset that imbalance felt by consumers by reducing individuals’ actual premiums. Secondarily, the CBO has dramatically reduced their estimate of the uninsured impact. During the summer, their assessment was 15 million uninsured in the first year, which is now an estimate of only 4 million. The reason provided for the changes is that CBO believes individuals and employers will react more slowly than previously thought.
Even though the projected reductions in enrollment numbers have come down, removal of the individual mandate is highly impactful, as these projections still represent a sizable portion of the overall individual market—significant enough to create real challenges for insurance carriers working to manage balanced risk pools within these markets while also meeting the insurance reform requirements of the ACA. Repeal of the individual mandate could continue a slow pulling back from the individual market that we’re seeing from some larger insurance carriers.
A stable individual market has positive effects on the employer-sponsored benefits market. Considering the CBO now projects that as long as the APTC is in place the individual market will remain stable. This means that any impact on the cost of employer-sponsored premiums is likely to be very small. Where it was possible that some individuals may stay employed longer to maintain coverage to avoid the individual mandate penalty, those scenarios would go away and employees would be more willing to leave an employer they had stayed with to avoid the penalty. However, again these impacts would be expected to be very small based on the size of the current tax penalty (For tax year 2017, the penalty is 2.5 percent of an employee’s total household adjusted gross income, or $695 per adult and $347.50 per child, up to a maximum of $2,085. Whereas the average cost of family coverage for employer-sponsored health insurance is roughly $5,000).
It’s important to note that the ’employer mandate’ remains in effect (in addition to the APTCs), and as a result, 1094-C and 1095-C reporting is still required. There is however, one section of the 1095-C form (section III) that will likely become obsolete due to repeal of the individual mandate.