Grab your CPA’s cell number! With the ink from President Trump’s signature on the new tax reform bill not even dry, employers and employees are scrambling to try to understand what if any actions to take in the next nine days to avoid a more adverse tax result for those actions beginning Jan.1.
We are not corporate or individual tax experts (we don’t even play one on TV), so interested employers and employees will want to consult their tax advisers on these matters, but here is a list of some of the questions we (the author and my colleagues Mark Holloway and Sam Henson, and our other associates in Lockton Compliance Services and Lockton Retirement Services) are hearing from employers and employees:
- “We buy our group insurance. Should we prepay our 2018 premium in 2017, so we can reap the benefit of a deduction in a 35 percent tax bracket? If we do, can we collect premiums from employees in 2018 and repay ourselves, if we prepaid the employee portion too, before the end of this year?”
Interesting idea. The issue is more compelling for a subchapter C corporation than a subchapter S corporation or partnership, because of the steep reduction in tax rates for C corporations for years after 2017. Your tax adviser can crunch the numbers for you to determine if it makes sense to even ponder.
Beyond that, the IRS may not allow an accelerated deduction when the expense creates an asset (e.g., insurance coverage) having a useful life that extends substantially beyond the close of the taxable year in which the expense is incurred. As noted above, this is an issue best addressed by your tax adviser.
Prepaying the employee portion of 2018 premium, and repaying yourself from payroll deductions, creates potential ERISA prohibited transaction issues. The Department of Labor allows this sort of thing in other contexts, but the safer play from an ERISA standpoint may be to prefund just the employer’s share of the premium, assuming of course that doing so yields the tax advantages you’re hoping for.
- “We self-insure our medical benefits. Should we think about prefunding 2018’s anticipated claims and administration expenses?”
Here too the issue is more compelling for subchapter C corporations than S corporations and partnerships. Self-insured employers can prefund, through a welfare benefit fund (e.g., a trust), a portion of anticipated healthcare expenses for the coming year. There are significant limits on this prefunding, but also some exceptions to those limits for certain categories of participants. The rules are complex, and of course if the employer does not already have a trust in place, time is running short to create one.
- “We offer retiree health benefits. Should we prefund those expenses?”
While few employers continue to offer retiree medical benefits, those that do often prefund those expenses, using a trust. These anticipated expenses can be prefunded up to the present value of the expected future liability for participants already retired (a modified rule allows for tax-advantageous prefunding of anticipated retiree medical costs for currently active employees). Most employers using a trust for this purpose invest the trust assets, which can trigger complex tax obligations. For 2018, this too is a more compelling question for C corporations than other business structures.
- “Should we prefund severance payments?”
Some employers are prefunding severance payments, using a trust as a holding vehicle. Limits exist on the extent to which severance benefits can be prefunded, and nasty ERISA issues arise if the severance payouts for a payee exceed two years. As with the previous questions, tor 2018 this question is more compelling for C corporations.
- “Should we prefund disability benefits?”
If the employer self-insures long-term disability benefits, it can prefund those benefits through a trust. Formulas are applied to determine which benefits can be prefunded, and to what extent. Other limits apply to prefunding short-term disability benefits. As with the previous questions, tor 2018 this question is more compelling for C corporations.
- “I’m thinking about converting a regular IRA to a Roth IRA (or I already did that in 2017, and am now rethinking that conversion). What should I do?”
You’ll want to quickly consult your personal tax adviser. The new federal tax bill lowers income tax rates after 2017, so it might make sense to defer the conversion (or recharacterize a conversion already made in 2017).
- “I’m about to get divorced. Will the tax law change affect me?”
Under the tax reform bill, alimony payments under decrees entered into after this year are not deductible to the payor, nor includable in income of the payee. This fact will almost certainly lead parties to a domestic relations action to consider renegotiating potential agreements on alimony, if the decree will be entered into next year or later.
- “I have the ability to prepay a property tax installment for 2018. Should I?”
This is another excellent question for your personal tax adviser. Many taxpayers won’t be able to deduct all of their 2018 property tax payments made in 2018. The new tax law might permit an accelerated deduction of 2018 property tax payments made in 2017.
The new tax law includes a number of changes to fringe benefits for years after 2017. Transit benefits, for example, undergo a significant change in tax treatment, a change that creates some complex tax issues particularly for tax-exempt employers that provide those benefits. Learn more about the tax reform bill’s key changes in our webcast on Jan. 10 at 2 p.m. CST. You can register here.