The following outlines some provisions of the Act that apply to compensation and benefits. It is not intended as a technical discussion but instead is an attempt to outline some things that may apply to the way businesses compensate their workers.
- There are two basic types of individual retirement arrangements (IRAs): traditional IRAs, to which both deductible (pre-tax) and nondeductible (after-tax) contributions may be made, and Roth IRAs, to which only nondeductible contributions may be made. The principal difference between these two types of IRAs is the timing of income tax inclusion. Taxpayers can convert a traditional IRA to a Roth IRA by paying the tax due on the converted amount.
- A special rule has allowed taxpayers a grace period to decide if they want to pay the tax, by allowing the taxpayers to “unwind” a conversion by recharacterizing the conversion as a contribution to a traditional IRA. The old rule gave taxpayers until the due date of their tax returns for the year of the conversion to take advantage of the unwind provision. As of January 1, 2018, that flexibility is no more. If you have converted an individual IRA to a Roth IRA or are thinking of doing so, you should be aware that you no longer have the ability to reverse the transaction.
Rollover of Plan Loans (IRC Section 402(c)(3))
- Under prior law, if an employee took a loan from a qualified plan maintained by an employer (e.g., a 401(k)) and then terminated from service, any outstanding loan amount was treated as a taxable distribution if it was not rolled over into a new IRA within 60 days.
- In tax years beginning after December 31, 2017, the Act allows taxpayers in that situation additional time to roll the loan over into an IRA – up until the due date for the taxpayer’s return for the year.
Excessive Employee Compensation (IRC Section 162(m))
- Under IRC Section 162(m), public companies cannot deduct compensation paid to certain covered employees (i.e., the CEO and the three highest paid employees) in excess of $1 million unless an exception applied.
- In what amounts to a huge change, the Act repeals the exception for “performance based compensation.” This exception was generally employed in incentive compensation plans that had performance milestones.
- The new rule applies for tax years starting after December 31, 2017 but a grandfather rule applies to amounts payable under written contracts that were in place and binding on the corporation on or before November 2, 2017.
Qualified Equity Grants (IRC Sections 83, 422, 3401 and 6652)
- The Act now permits employees of certain privately held companies to make an election to defer the tax that would otherwise be due on grants of restricted equity when the restrictions lapse and the stock is no longer subject to a “substantial risk of forfeiture.”
- The election applies to stock attributable to options exercised or restricted stock units (RSUs) settled after December 31, 2017 (with some transition rules). However, the options or RSUs must be issued pursuant to a plan that provides that 80 percent of the company’s employees in the year of issuance (including new hires) will receive stock rights in the same form (i.e., RSUs or options) with the same rights and privileges.
- The election provides for deferral until the earliest to occur of various events which generally include (i) the end of a five-year deferral period from the dates the rights were vested, (ii) the date on which the stock is readily tradeable on an established securities market, or (iii) the taxpayer’s revocation of the election.
- The employer’s deduction is deferred when an employee makes the election until the employee is required to include the value of the stock in income.
- The Act includes detailed compliance provisions with respect to notice, withholding and reporting.
- Observation: The provision was intended to help employees in start-ups who are often compensated with equity grants. The start-up companies usually do not need the deduction in the early years so the deferral of the expense is not problematic for the employer. However, the requirements are sufficiently restrictive that it is unlikely to be a tool available to many companies.
Affordable Care Act Insurance Mandate (IRC Section 5000A)
- Effective after December 31, 2018, individuals are no longer required to have insurance or pay a tax. The insurance mandate is still in effect through 2018.