How the Senate bill affects employee benefit taxes
The finer details of the Senate-passed tax legislation relating to employee benefits reveal several areas of disagreement with the House of Representatives’ bill. In the long run, the Senate version may be less favorable to the existing employee benefit structure, but experts say that the upper chamber’s provisions are more likely to win out in upcoming conference committee debate, due to stricter procedural rules on the Senate side.
While the Senate bill does not alter some tax advantages that the House would change, such as adoption assistance, areas of the legislation that could disrupt the existing benefit structure include the removal of certain transportation tax deductions, but more so the elimination of the Affordable Care Act’s individual mandate to buy insurance.
Unlike the House, the Senate pulled the plug on the Affordable Care Act’s individual mandate. Washington watchers predict the Senate’s position on the issue will prevail in the ultimate bill sent to President Donald Trump, due to the mandate’s political unpopularity.
Jeff Smith, a partner in the Cleveland office of Fisher Phillips, says the general theme of opposition to the ACA was, “Don’t make me do something I don’t want to do.” While Republicans in Congress failed earlier this year to achieve their long-held goal of repealing the ACA, killing the individual mandate could represent at least a small victory.
In the Senate bill, the individual mandate repeal would take effect in 2019. Voiding the mandate would offset $318 billion in tax cuts in other parts of the bill over a 10-year period, according to Senate estimates. Any tax overhaul provision that puts a dent in the tax package’s estimated $1 trillion (or more) net addition to the national debt is likely to remain in the final law.
How would this impact employers? The effects would be indirect. “It mainly would introduce uncertainty into insurance markets, and that’s not good for anybody,” says Tim Verrall, an Ogletree Deakins shareholder based in Houston. There is also the prospect of an adverse selection “death spiral,” ultimately driving up health insurance costs for employers, he notes.
It is also possible that some healthy employees now covered by employer health plans but groaning under the burden of co-insurance payments will simply drop their coverage and not seek it elsewhere. If such employees end up becoming seriously ill and lack the funds to receive care, that’s bad news for employers as well as the affected employee.
Other benefit provisions
Looking at the big picture, although many employers might benefit financially from the tax overhaul measure’s reduction of corporate tax rates, observers don’t expect they would be motivated to plow any of those tax savings into reducing employees’ share of their health benefits’ cost.
Here are some more ways the Senate’s tax bill addresses other benefit issues:
- Changes on the Senate floor made its bill consistent with the House version loosening up 401(k) hardship withdrawal rules, permitting plan participants to take out earnings on their accounts in addition to principal amounts, and dropping a requirement that they have tapped out maximum plan loans before taking a hardship withdrawal;
- The Senate version of the elimination of employer’s ability to deduct qualified transportation fringe benefits is broader in scope than the House version.
- The Senate bill, unlike the House version, eliminates the “qualified bicycle commuting benefit” reimbursement exclusion, until 2025.
- The Senate bill includes a provision absent in the House version that would grant employers tax credits for paid family leave benefits to “qualifying” employees, subject to several limitations.
- The Senate bill does not include a House bill provision that would eliminate the employee tax exclusion for adoption assistance programs.
How it will all shake out will be determined in the near future, as lawmakers are aiming to have a final bill on Trump’s desk before Christmas. However, Will Hansen, a senior vice president of the ERISA Industry Committee (ERIC), predicts the final version “will look a lot more like the Senate version.” The reason, he says, is that Senate procedural rules make it more difficult to change legislation at the conference committee stage.
One future revenue-raising tax law now on the books that employers had hoped would be repealed by the tax bill, the ACA’s Cadillac tax — now scheduled to take effect in 2020 — failed to make it into either version of the legislation.
In fact, a minor provision included in both bills would make that 40% excise tax even more onerous by changing the index used for annual adjustments of the excise tax threshold from the consumer price index (CPI) to a “chained CPI” used for Social Security benefit indexing. It typically rises more slowly than the CPI. The effect would be to make the tax burden grow more rapidly than it otherwise would have.
Joy Napier-Joyce, head of law firm Jackson Lewis’ employee benefits practice, believes that Congressmen who oppose repealing the Cadillac tax have wanted to keep it as a bargaining chip for future legislative battles.