Just before the holiday break, Congress passed the Tax Cuts and Jobs Act (H.R. 1), which was signed into law by President Trump on December 22, 2017. Although the far-reaching implications of the new tax law won’t be fully realized for some time, there are several noteworthy provisions that will impact employers immediately.
Elimination of Deductions for Settlements of Sexual Harassment and Sexual Abuse Claims Subject to Non-Disclosure Agreements
With the momentum of the #MeToo movement following a slew of high-profile sexual harassment claims, Congress included a provision in the new tax law which disallows the tax deduction of any settlement or payment related to sexual harassment or sexual abuse, including related attorneys’ fees, if such settlement or payment is conditioned upon the execution of a non-disclosure agreement.
The tax provision adds Section 162(q) to the Internal Revenue Code and states:
“Payments related to sexual harassment and sexual abuse – No deduction shall be allowed under this chapter for –
1. any settlement or payment related to sexual harassment or sexual abuse if such settlement or payment is subject to a nondisclosure agreement; or
2. attorney’s fees related to such a settlement or payment.”
The provision only applies to settlements “related to” sexual harassment or sexual abuse claims where the settlement agreement requires confidentiality and non-disclosure. In other words, if the agreement prevents the alleged victim of harassment from sharing the underlying facts giving rise to the sexual harassment or abuse claim, or from discussing the terms of the settlement publicly, then the employer will not be able to deduct the amount of settlement or the attorneys’ fees incurred as a business expense. The provision is effective for amounts paid or incurred on or after the date of enactment (December 22, 2017).
The new tax law raises several questions which will need to be addressed by the IRS or the courts. For example, the “related to” standard is inherently ambiguous, particularly where a settlement is reached before the filing of any claim or complaint. Additionally, where a claim has been filed, it is unclear whether the entire settlement amount will be non-deductible if the sexual harassment or abuse claim is brought with other claims, such as unlawful termination or retaliation. Similarly, it remains unclear whether employers will be permitted to allocate a portion of attorneys’ fees to a claim of sexual harassment and the remainder to other non-related claims. Lastly, although seemingly an unintended consequence of the hasty passage of the tax bill, on its face the exclusion appears to apply equally to victims of sexual harassment, potentially eliminating their ability to deduct legal fees incurred in pursuing sexual harassment claims. We are optimistic that the IRS will issue guidance on how to comply with the broad new tax provision, which hopefully will address some or all of these issues.
Going forward, employers will need to weigh the necessity of a non-disclosure provision on a case-by-case basis. For many employers, the value of confidentiality may outweigh the additional tax burden, but the tax issue is at least something to consider.
Tax Credit for Paid Family Leave
Under the federal Family and Medical Leave Act (“FMLA”), covered employers must provide eligible employees with up to twelve (12) weeks of unpaid leave for specified reasons. The new tax law encourages employers to provide paid leave by providing businesses with a federal tax credit if they provide at least two (2) weeks of paid family and medical leave to qualifying employees per year pursuant to a written policy.
Under the new law, eligible employers can claim a credit equal to 12.5% of the amount of wages paid to qualifying employees during any period in which such employees are on family or medical leave for one or more of the specified reasons under the FMLA, if the rate of payment is at least 50% of that employee’s regular wages. The credit is increased by 0.25 percentage points (not to exceed 25% total) for each percentage point in which the rate of payment exceeds 50% of the employee’s regular wages. Although the amount of the tax credit will vary, it is only available for paid leave payments provided to qualifying employees who have been employed by the employer for one year or more and who, for the preceding year, were paid at or below 60% of the compensation threshold for “highly compensated employees” under the Internal Revenue Code (i.e., $72,000 per year for 2018). The maximum amount of leave subject to the credit is 12 weeks for any taxable year.
The new tax law clarifies that any paid leave which is mandated or paid for by state or local governments “shall not be taken into account in determining the amount of paid family and medical leave provided by the employer.” Likewise, paid leave provided as vacation leave, personal leave, or other medical or sick leave (for purposes other than those specifically provided for under the FMLA) would not be considered to be family and medical leave for purposes of this section of the Internal Revenue Code.
Employers should ensure that their written policies are up to date and satisfy the requirements of the new tax law in order to apply for the credit. The tax credit is currently set to expire on December 31, 2019, although it may be extended by Congress.
Miscellaneous Fringe Benefits
The new tax law also makes a number of changes to fringe benefit arrangements. For example, it eliminates employer deductions for certain entertainment, amusement or recreation expenses, limits the employer’s deduction for certain employee meals, suspends the deduction until 2026 for employee moving expenses (exceptions exist for members of U.S. Armed Forces and their family members), and narrows the employer’s deduction for certain employee achievement awards by eliminating cash, gift cards, gift coupons or gift certificates, cash equivalents, vacations, meals, lodging, tickets to theater or sporting events, stocks, bonds, other securities and other similar items.
In addition, previously-existing deductions for employers who provided qualified transportation fringe benefits to their employees are eliminated under the new tax law. Employees may continue to exclude from their taxable income the value of any employer-provided subsidy of these benefits (up to $260 per month during 2018), except that employer reimbursements to employees for commuting by bicycle are now considered taxable income to the employee. Employers should be mindful that some local laws, such as New York City’s Affordable Transit Act, require certain employers to offer a commuter benefits program to their employees.
Employers should review the fringe benefits they offer as common perquisites to applicants and employees to determine if they are still cost-effective without the deductions.
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