New Changes to Fringe Benefits: What’s The Deal?

When it comes to recruiting or retaining the best and brightest, HR leaders know — it’s not just about salary. Ancillary “job perks” weigh heavily on someone’s decision to jump ship or join a new team. In the brokerage world, we refer to many of these perks as “fringe benefits”. For example, stock options, commuting allowances, or employee discounts on goods and services. Fringe benefits are forms of employee compensation other than money that employers can provide to employees to recognize performance or enhance the employee experience. They are powerful recruiting and retention tools and incentivized by the IRS in the form of tax breaks and credits for your organization.

I get it…tax talk isn’t the most riveting topic. But it’s important to understand how changes in tax law impact the way your organization can support its employees. Any employee benefits that do not comply with current IRS rules are considered taxable income for employees.

As of January 1, 2018 several changes have been made to the Tax Cuts & Jobs Act (TCJA) that will impact tax breaks for employee fringe benefits. Unfortunately, most of the recent changes aren’t favorable. However, there is one change that created a new tax break for your organization and benefits the employees. Here’s the rundown:

Transportation Fringe Benefits

Prior to January 1, 2018, employers could deduct the costs associated with providing employees with qualified transportation benefits like transit passes, allowances for parking, and transportation in a commuter highway vehicle on a tax-free basis. Under the new TCJA, this is no longer the case. Only transit expenses necessary for employee safety may be deducted (e.g., late night transportation). The TCJA changes will also suspend benefits for employees who opt to ride a bike to work.^[1]

Employer-Provided Meals & Entertainment

Before the TCJA changes, employers could deduct expenses for business-related meals and entertainment provided to employees. This is no longer the case. As of 2018, entertainment deductions have been completely repealed. Expenses associated with employer-provided food and beverages have a 50% limitation (provided they are delivered through a de minimis-qualified eating facility). In other words, no lobster dinners from world-class restaurants. Employers can only deduct reasonable, necessary meals served on-premise only. By 2026, this fringe benefit will be completely non-deductible. However, employee tax exclusions for meal expenses on work travel will remain the same.^[2]

Employee Achievement Awards

Before 2018, employers could provide employee achievement awards (within reason) on a tax-free basis. Employee achievement awards are still deductible for employers but under greater limits. Changes have eliminated the business tax deduction and employee tax exclusion for employee achievement awards in the form of cash, gift cards, vacations, meals, lodging tickets, stocks, bonds or other securities. However, employers can still receive tax breaks for “tangible property” gifts. For example, plaques or watches selected from a catalog. ^[3]

Unreimbursed Business Expenses

Prior to 2018, employees could deduct unreimbursed work-related expenses as miscellaneous deductions (subject to a 2% adjusted gross income limit). Under the new TCJA, employees are no longer able to deduct unreimbursed work-related expenses (for example, business mileage) on their personal tax returns.^[4]

Moving Expense Reimbursement

Once upon a time, qualified expenses incurred to move people and personal belongings from one residence to another could be excluded from an employee’s gross annual income.

Now, all qualified moving expense deductions and exclusions are suspended, which has employers worried about their relocation programs. Whatever an employer pays or reimburses must be reported as “compensation” for services (except for active duty members of the armed forces). Here’s the catch: employers can still deduct amounts for employer-provided moving expenses as a “necessary business expense” but only if the amounts are included in the employee’s taxable wages.^[5]

A New Tax Break For Employees on Paid Leave

Fortunately, the recent tax changes aren’t entirely bad. In 2018 and 2019, organizations that offer paid family and medical leave can take advantage of a tax credit equal to 12.5% of wages paid to a qualifying employee. Keep in mind; this is a temporary tax credit that will expire after 2019. To qualify for this tax credit, organizations must have a written policy in place that offers at least two weeks of pay (at minimum 50% of the employee’s wages) to qualified employees for family and medical leave per year.^[6]

Over the next several months, open lines of communication will be key in helping employers and employees understand and adjust to these changes. To ensure a seamless transition to these new rules, consider working with a brokerage firm that understands in detail how your organization can leverage these changes while protecting the employee experience.