November 15, 2017

What Does the New Tax Proposal Mean for Employee Benefits?

The “Tax Cuts and Jobs Act” has hit debate in the House of Representatives, and summaries of a similar bill are coming out of the Senate. President Trump’s administration has been promoting the legislation for months as a remedy to an overly complex system and a means to provide tax relief to those at all income levels. But what in these bills could affect tax breaks that businesses and their employees receive for their benefits? Let’s take a look.

The Senate bill may repeal the ACA Individual Mandate.

The Senate is looking to introduce a repeal of the "individual mandate," a provision within the Affordable Care Act that requires individuals to either purchase health insurance or pay a tax penalty. Many employers are concerned that, if repealed, this could lead to a higher number of uninsured Americans and higher healthcare costs for payers. Senate Republicans are looking at this repeal as potential $338 billion in saved revenue—without it, federal subsidies for low- and middle-income families who buy health insurance would be eliminated, but tax relief may reach these families instead.

President Trump has tweeted about this issue:

Medical expense deductions could be eliminated.

While the Senate’s bill would leave medical expense deductions in place for those who itemize, the House bill would eliminate it. Both bills propose an increase in the standard deduction from $6,350 for single people and $12,700 for married couples to $12,000 and $24,000 respectively. By nearly doubling the standard deduction, the bill hopes to encourage those who would normally itemize to instead file with the standard deduction.

Senate Republicans have also proposed providing a larger standard deduction for blind and elderly taxpayers, since they are the biggest beneficiaries of the medical expenses deduction, though there’s no word yet on how big it would be.

Tax exemptions for employer paid plans remain in place.

Neither bill removes the tax exemptions offered to employers or employees for their healthcare plans. While it was rumored that these exemptions were on the table for the Trump Administration, lawmakers are not pushing for it in these bills. A move to make premiums taxable would likely face wide opposition from employer groups and individuals alike.

Dependent care FSAs would be taxable.

The House bill moves to repeal the tax exclusion for dependent care FSAs, so any contributions to these accounts would be post-tax. Parents and caretakers can currently put away $5,000 pre-tax each year in dependent care FSAs. The most likely demographic to utilize FSAs are middle to high income earners.  

401(k) contribution limits would remain the same.

House Republicans had been pushing for lowering the cap on pre-tax 401(k) contributions. The limit is currently $18,000 a year. The Trump Administration pushed back on this proposal, and it’s no longer in the House bill.

Many employers are focused on financial wellness as a new realm of benefits, and changes to 401(k) contributions could affect their strategies and programming.

The Cadillac Tax is still looming.

Some in the benefits space were hoping tax reform might eliminate an ACA provision unpopular among employers—the Cadillac Tax. This 40% excise tax on high-value workplace health plans is slated to take effect in 2020, and neither the Senate nor House bills mention it. The date it takes effect has been pushed back several times by legislation, and employers would like to see it repealed altogether.

Overall, it looks like employers can find both bright spots and drawbacks in these bills. The House is expected to vote on their bill this week, and the Senate hoping to send legislation to President’s Trump’s desk by the end of December. Which of these provisions is most likely to affect your business or your member population?

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