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EFFECTS OF THE TAX CUTS AND JOBS ACT ON EXECUTIVE COMPENSATION
Much has been written about how the 2017 Tax Cuts and Jobs Act changed the tax rate for C corporations and created a deduction for S corporations. But all this attention to corporations meant that other impactful provisions went into effect without much notice. One such unheralded provision is the "Tax on Excess Tax-Exempt Organization Executive Compensation" (the "excise tax").
WHAT IS THE EXCISE TAX?
An excise tax of 21 percent is imposed on the remuneration paid by all tax-exempt employers in the following two situations:
THE EXCISE TAX’S REACH
Just in case there was any confusion, the excise tax applies to all tax-exempt entities, including political organizations and farmers’ cooperatives. Employees whose compensation will trigger the tax-exempt entity to have to pay the 21 percent excise tax, making them "covered employees" for the purposes of the excise tax, include
Depending on the tax-exempt entity examining the excise tax, the tax-exempt employer might have a tendency to despair or to dismiss the excise tax as being not applicable. Before we do either of those things, let’s look at the few exceptions and some of the opportunities arising from the excise tax.
The excise tax doesn’t apply to
Many tax-exempt entities are likely to be quick to dismiss the excise tax as not applicable to their employees because of the $1 million threshold. Those employers need to be careful that they don’t also ignore the fact that any single 457(f) payment that exceeds the threshold is subject to the tax made at the time of separation from service. Any amounts paid to a highly compensated employee under a SERP or 457(f) plan could be subject to the excise tax, not just the amounts paid to the top five employees. In addition, the excise tax applies to amounts paid to covered employees from related organizations, which is determined by common control. Avoiding the excise tax isn’t as simple as creating a taxable entity to employ all covered employees.
THE GOOD NEWS
While it may seem that providing compensation to those employees who are crucial to the tax-exempt entity’s continued success is impossible without paying a hefty excise tax, that’s not necessarily the case. There are ways careful design of a compensation plan, coupled with the use of life insurance, can allow a tax-exempt entity to still provide meaningful remuneration to its employees without negative tax consequences to either the employer or the employee. The best place for a tax-exempt employer to start is by conducting a thorough review of the remuneration paid or promised to its highly compensated employees to determine the full applicability of the excise tax. Then the tax-exempt entity can start the process of revising its compensation structure to fit within the parameters of the excise tax.
The job market is starting to tighten, and would-be employees are looking for extra benefits that make the organizations they apply to stand out from the crowd. One such benefit is student loan assistance. On Aug. 17, 2018, the IRS issued private letter ruling 201833012 (the "PLR"). The PLR addressed an individual plan sponsor's desire to amend their 401(k) plan to include a program for employees that were making student loan repayments. The form of this benefit would be an employer nonelective contribution ("SLR Contribution").
HOW DOES IT WORK?
The design of the plan would result in matching contributions being made available to participants equal to 5% of compensation for every 2% of compensation deferred. Specifically, employees could receive up to 5% of compensation in the SLR Contribution for every 2% of student loan repayments they made during the year, and the appropriate SLR Contribution would be calculated at year-end.
The PLR states the program would allow a participant to both defer into the 401(k) and make a student loan repayment at the same time, but they would only receive either the match or the SLR Contribution — not both for the same pay period. If an employee enrolls in the student loan repayment program and later opts out without hitting the 2% threshold necessary for a SLR Contribution, they would be eligible for matching contributions for the period in which they opted out and made deferrals into the plan.
The PLR requested that the IRS rule that such design wouldn't violate the "contingent benefit" prohibition under the Internal Revenue Tax Code (the "Code"). As background, the Code's contingent benefit prohibition essentially states that the only benefit that can be conditioned upon an employee's elective deferrals is a matching contribution. In response to the plan sponsor's request, the IRS ruled that the proposed design doesn't violate the contingent benefit prohibition, therefore allowing SLR contributions to be made when employees pay student loans.
WHAT'S THE CATCH?
All that said, it's important to note that a PLR is directed to a specific taxpayer requesting the ruling, and it's applicable only to the specific set of facts and circumstances included in the request. That means other taxpayers – plan sponsors – cannot rely on the PLR as precedent. It is neither a regulation nor even formal guidance. However, it provides insight into how the IRS views certain arrangements. Thus, other plan sponsors that wish to replicate the design of the facts and circumstances contained in the PLR can do so with some confidence that they similarly will not run afoul of the contingent benefit prohibition.
From a practical perspective it's important to consider a few related, and impactful, concepts and qualified plan rules. First, companies are increasingly aware of the heavy student debt carried by their employees and wish to assist them in alleviating this burden. They're exploring multiple programs they can offer than can help their employees. This particular design is meant to allow employees who cannot afford to both repay their student loans and defer into the 401(k) at the same time the ability to avoid missing out on the "free money" being offered by their employer in the 401(k) plan. It works by essentially replacing the match they miss by not deferring with the SLR Contribution they receive for participating in the student loan repayment program.
It's important to understand that, while the IRS has ruled in regard to the contingent benefit prohibition, they stated definitively that all other qualification rules (such as testing and coverage) would remain operative. Plan sponsors wishing to pursue adding such provisions to their 401(k) plans must be aware of how they undertake the design. This design is very basic in that it requires deferral/student loan repayment equal to 2% for a 5% employer contribution (either match or SLR Contribution). There can be no variations from this design, as varying the employee student loan payment required to receive a SLR contribution could create separate testing populations, which would make annual testing and administration much more difficult.
THE BOTTOM LINE
If you're considering adding a student loan repayment program to your benefits package or wish to explore the potential for a qualified plan integrated program, please contact your plan advisor.
Jason E. Levine. "Private Letter Ruling 201833012." IRS Static Files Directory.This material was created by NFP (NFP), its subsidiaries or affiliates for distribution by their registered representatives, investment advisor representatives, and/or agents.
Ed O'Malley, Executive Vice President, Head of Insurance Brokerage and Consulting
The Tax Cuts and Jobs Act of 2017 (TCJA) has shifted – and in many cases eased – the tax burden on companies across the country. Organizations everywhere are finding themselves with an exciting influx of new money thanks to the new tax reductions.
There are a lot of ways businesses can choose to spend those dollars. Some may choose to build up their cash reserves, others may decide to repurchase company shares, and others still may choose to divert resources to technology, inventories or infrastructure. Smart organizations, though, may decide this is an opportune time to reinvest in their talent.
Meanwhile, net job growth remains slow and employers are reporting an alarming shortage of qualified candidates for open positions – particularly in technology – and jobs remaining unfilled.
So what can employers do as a result of the TCJA? Stay competitive and:
To get the best talent on their team, businesses need to double down on competitive compensation and benefits. With the TCJA, some traditional incentives are disappearing and companies will need brand new ways to attract talent and show existing employees they care. 170,000 new jobs are created each month, and 3 million people are quitting their jobs each month — evidence that competition in the labor market is one of the toughest business challenges in 2018.
Some corporations are already sharing the cash increase with their employees: AT&T gave bonuses to 200,000 union-represented and non-management employees; Fifth Third Bank and others raised their minimum wage to $15 an hour and gave out bonuses; companies like Boeing are committing millions to workforce development in the form of training, education and other personnel development; and FedEx and CVS reported plans to create thousands of new jobs.
Offering perks to employees on-site, like more flexible work schedules, open telecommuting policies, paid parental leave, free on-site refreshments, mentoring programs and more, can also help create a people-centric culture that's attractive to employees, especially millennials. And using technology to find and hire the best talent can help make the process easier for prospects as well as simpler and more sophisticated for hiring managers. Don't forget the power of social media, either. Would-be employees of all ages are plugged in to Facebook, Twitter, LinkedIn, Instagram and myriad other sites. More than ever, businesses should be involved and savvy about the way they present themselves and engage with clients, employees and prospects throughout the digital world.
Good employee health benefits will always be immensely important to both incoming and existing employees. The individual mandate penalty will disappear starting in 2019, which means that individuals have no tax incentive to maintain minimum essential health coverage. However, employers of a certain size still need to offer coverage. The cash influx from tax savings could be just the thing a business needs to beef up its health plan for existing employees and to attract new employees and to keep top talent and their families happy, healthy, wealthy and at the top of their game.
To that same effect, consider enhancing death and disability benefits to protect employees' families and income when the unexpected occurs. You can always improve upon existing plans that currently cap life insurance and disability benefits. Income replacement benefits have been fairly static over the last decade or so, making this a great place to stand out when it comes to attraction policies.
Employment is a partnership, and it's important for a workplace to show their employees they care at the very beginning — from the first interview to the first day and beyond.
Once a business has the talent on board, they have to keep them; other companies won't be resting on their laurels in the light of that tax savings, either. Keep existing employees happy – or make them even happier – and they'll continue to deliver successes and be more excited to do it.
Employees are under incredible financial stress today. Most don't even know how much stress they're under; they just recognize it's beyond their understanding and thus their control. Employers can take steps to help rid them of this stress, which, in turn, will make their employees happier and more productive.
There are plenty of ways to ease concerns about today and tomorrow:
Planning well for your employees' retirement is an important way to both show them you care and to make sure your workforce is always in its prime. After all, if there's incentive to retire – and retire well – that frees up space for fresh-faced young talent to come in with new ideas and less significant salary histories.
With some TCJA money burning a hole in your business's pocket, get creative with the ways you tend to your and your employees' futures:
New legislation is making many businesses more cash flush, and it will be interesting to see how that new capital flows throughout the economy. These are just some of the ways many businesses can attract, keep and steward the careers of the best workers in the industry. By staying educated about the nuances of how the Tax Cuts and Jobs Act of 2017 affects each piece of the insurance brokerage and consulting industry – and how those pieces interact – decision-makers at all levels of the organization can make the best choices to protect their employees, their personal wealth and their futures.This material was created by NFP Corp. (NFP), its subsidiaries or affiliates for distribution by their agents, registered representatives or investment advisor representatives. This material was created to provide accurate and reliable information on the subjects covered but should not be regarded as a complete analysis of these subjects. It is not intended to provide specific legal, tax or other professional advice. Neither NFP, its subsidiaries or affiliates offer legal or tax advice. The services of an appropriate professional should be sought regarding your individual situation. Insurance services provided through licensed subsidiaries or affiliates of NFP. To locate an NFP office, please go to nfp.com
On Nov. 28, 2018, in a piece of unexpected and good news, the IRS published Notice 2018-94. This notice extends the due date for providing Forms 1095-B and 1095-C to individuals and employees and extends the good faith effort relief from penalties for mistakes on Forms 1094-B, 1095-B, 1094-C and 1095-C.
On the due date extension, the notice extends the due date for providing the 2018 Forms 1095-B and 1095-C to applicable individuals from Jan. 31, 2019, to March 4, 2019. Importantly, the notice does not extend the due date for filing 2018 Forms 1094-B, 1095-B, 1094-C or 1095-C with the IRS. Thus, employers should still plan to file the appropriate forms by Feb. 28, 2019 (if filing by paper) or April 1, 2019 (if filing electronically). The notice also states that because the automatic extension of the due date to furnish is as generous as the permissive 30-day extension to provide notices to individuals/employees, the IRS will not formally respond to any request for such an extension.
Impact on Employers
On the good faith effort relief, the notice extends relief from past years to the 2018 forms. Specifically, the good faith effort relief means that employers who work in good faith to complete the forms will not be assessed penalties relating to inaccurate or missing information. For example, if an employer timely files a Form 1094-C and related Forms 1095-C and has made a good faith effort to complete the forms correctly, but makes some mistakes on employee information, social security numbers, birth dates or reporting codes (on Lines 14, 15 and 16), the IRS will not assess reporting penalties. (Employers should remember that reporting penalties are distinct from employer mandate penalties for not offering affordable coverage to full time employees.) In determining good faith efforts, the IRS will consider multiple factors, including whether the employer made appropriate efforts to gather and transmit necessary data to a vendor or agent to submit to the IRS.
Lastly, the notice states that the IRS is reviewing whether the repeal of the individual mandate tax penalty (which takes effect in 2019) will change the reporting requirements under IRC Section 6055 for self-insured employers and other coverage providers (such as an insurer of a fully insured plan) to report on all covered individuals under the plan on either Form 1095-B or 1095-C. NFP Benefits Compliance will continue to monitor any developments that might impact employer reporting obligations in future years.
Should you have questions regarding employer reporting or employer mandate obligations, please reach out to your NFP team.