Vol. XVII, Issue 3
This article summarizes changes made by the recently enacted tax reform [informally known as the Tax Cuts and Jobs Act (the Act)] that may impact United Methodist annual conferences and other UMC benefit plan sponsors, as well as benefit plan impacts to participants. The second half of the article addresses some other changes that were proposed but ultimately not included in the Act.
Qualified Moving Expense Reimbursement Exclusion—Temporary Suspension
Before 2018, qualified moving expense reimbursements provided by employers to employees were excludable from gross income if the reimbursements satisfied requirements of Section 132(f) of the Internal Revenue Code (the Code). Under the Act, this exclusion from gross income has been suspended (i.e., temporarily repealed) for tax years 2018 through 2025. In 2026, the moving expense reimbursement exclusion will again become effective (unless the suspension is repealed or made permanent by future legislation).
Unfortunately, this means that moving expense reimbursements provided by employers to employees (e.g., by an annual conference or local church to clergy) in years 2018 through 2025 will be taxable income to employees. Although the IRS guidance on Form W-2 reporting for 2018 may not be published for some time, Wespath reasonably presumes this will be reported along with other taxable income on an employee’s Form W-2. For clergy, the impact of losing this exemption means that the reimbursements will become “net earnings from self-employment,” so that the reimbursements will be subject to self-employment (SECA) taxes as well as income taxes (an increased financial impact). Along with the loss of the reimbursement exclusion, moving expenses paid by individuals also will not be deductible through 2025.
One important point on this particular change is that, because moving expense reimbursements are now taxable income (through 2025), they are also considered “plan compensation” under the Clergy Retirement Security Program (CRSP), the United Methodist Personal Investment Plan (UMPIP) and the Comprehensive Protection Plan (CPP). Inclusion of moving expense reimbursements in the definition of taxable income (and, therefore, “plan compensation”) will increase the amount on which accrued benefits, plan sponsor contributions, disability benefits and CPP premiums are based. Plan sponsors will need to consider how this change may impact their procedures on reporting plan compensation to Wespath, as well as the impact of the change in law on the total cost of benefits. Wespath will continue to analyze this issue and share thoughts with plan sponsors in future communications.
Qualified Transportation Fringe Benefits—New Tax for Tax-Exempt Organizations
Another unwelcome change in tax law is that tax-exempt employers must pay a new tax if they offer qualified transportation fringe benefits to their employees. Congress imposed this new tax by increasing the unrelated business taxable income (UBTI) of the employing organization by the amount paid or incurred by the organization for any qualified transportation fringe. An example of a qualified transportation fringe would be transit passes purchased by the employer and provided to employees. (Although the employer will pay this new tax, the transportation fringes will generally remain tax-free for employees, with the exception of employer reimbursements of bicycle commuting expenses.) The law requires the Secretary of the Treasury to issue appropriate regulations or guidance, so further details should be forthcoming.
Qualified Disaster Relief (2016)
On a more positive note, the Act contains special tax relief for distributions from retirement plans made to individuals during 2016 or 2017 whose principal place of abode during 2016 was located in a disaster area (as defined by the Act) and who sustained losses from the disaster. The tax relief consists of being able to avoid the 10% tax on early distributions from retirement plans, being able to spread the income taxes from such distribution over a three-year period, and having the option to repay qualified disaster distributions within a three-year period. Total distributions to a participant eligible for this relief cannot exceed $100,000.
Rollovers of Plan Loan Offsets
UMPIP and the Horizon 401(k) plan offer plan loans to participants and, like many retirement plans outside the UMC, contain a plan loan offset provision. Under this type of plan provision, any unpaid loan balance that exists at termination of employment is offset against a participant’s retirement account balance, and the offset amount constitutes a taxable distribution to the participant unless the participant makes a rollover of this amount (basically, a contribution to an IRA or other retirement plan). A participant who has the funds to make such a rollover might do this to avoid incurring a taxable distribution. Under the Act, the time period during which a rollover of a plan loan offset may occur is extended to the due date for filing one’s tax return for the year (typically April 15 of the following year). Previously, the deadline was 60 days after the plan loan offset.
Provisions That May Impact Charitable Giving
Some provisions of the Act that may be welcomed by taxpayers might have a negative impact on charitable giving. For example, the increase in the standard deduction for individual taxpayers (temporary through 2025) will result in fewer taxpayers being able to itemize charitable donations as deductions. An estimated 94% of taxpayers are now expected to claim the increased standard deduction instead of itemizing deductions. This is an increase from approximately 70% under the pre-Act law. Thus, fewer taxpayers will receive a tax benefit when making charitable donations. As another example, the Act doubles the estate and gift tax exemption for estates of decedents and gifts made in 2018 through 2025, increasing the exclusion amount from $5 million to $10 million. The $10 million exclusion is indexed for inflation (after 2011) and is expected to be approximately $11.2 million in 2018. The higher exclusion amount is expected to reduce the tax incentive for individuals to make deductible charitable bequests.
You may recall hearing of other potential changes that were proposed in prior forms of the tax bill, some of which were concerning to plan sponsors. Wespath is part of the Church Alliance, a coalition of 38 chief executive officers of denominational church benefit programs (including mainline and evangelical Protestant denominations; two branches of Judaism; and Catholic dioceses, schools and institutions). The Church Alliance engages policymakers to protect the unique nature of church plans. The Church Alliance engaged Congress, along with others in the benefit plan community, to prevent some of the provisions described below from being included in the Act.
“Rothification” of Retirement Plans
One proposal to raise tax revenue (and lessen the Act’s total cost) was to reduce the annual limit on employee “elective deferrals” (pre-tax or Roth contributions deducted from employee pay and contributed to a retirement account). The limit in 2018 is $18,500 (or $24,500 for individuals at least age 50 by the end of 2018). The proposal would have limited pre-tax elective deferrals to an amount such as $2,400 per year, and would have required that any elective deferrals in excess of that amount and up to the elective deferral limit be Roth contributions (which are contributed on an after-tax basis). By limiting the amount of pre-tax elective deferrals and forcing more personal retirement savings to be contributed on an after-tax basis, the proposal would have increased tax revenue on annual contributions, thereby reducing the cost of tax reform. Thankfully, this proposal did not become law.
“Harmonization” and Elimination of Special Contribution Rules for 403(b) and 457(b) Plans
Another proposal, also to raise tax revenue and lessen the total cost of the Act, was to “harmonize” the rules of different types of retirement plans. Section 401(k) plans (mainly used by for-profit employers) have slightly different rules than 403(b) plans (mainly used by tax-exempt employers) and 457(b) plans (mainly used by government employers). The proposal sought to change various rules of 403(b) and 457(b) plans to align to those of 401(k) plans. This would have eliminated some special provisions that apply to 403(b) and 457(b) plans, such as special catch-up contribution rules that apply to these plans, as well as the ability of plan sponsors to make contributions on behalf of participants up to five years after retirement. Although this harmonization language appeared in the Senate bill, it was removed from the Act.
Other Proposals to Health Plans and Fringe Benefits Not Included
The Act also left out some proposals that had been included in earlier versions of the House and Senate bills, including provisions that would have:
Thankfully, all of these exclusions remain in place.
Moreover, the Act did not make any changes to the clergy housing exclusion under Section 107 of the Tax Code.
As you may know, there is ongoing litigation concerning the constitutionality of the housing allowance provision in the Internal Revenue Code. Below is a summary of recent rulings.
On October 6, 2017, the federal district court for the Western District of Wisconsin declared the tax-free housing allowance for clergy under Section 107(2) of the Internal Revenue Code unconstitutional. The case is named Annie Laurie Gaylor, Freedom From Religion Foundation et al v. Steve Mnuchin et al.
On December 13, 2017, the court entered its final order in the case, which enjoins the government from enforcing Code Section 107(2). However, the court stayed, i.e., delayed the effect of, the order until 180 days after the conclusion of all appeals. Therefore, it could take a few years before a final decision is reached. This decision does not impact the constitutionality of in-kind church-provided housing, often called a parsonage, manse or rectory [provided under Code Section 107(1).]
You can read more about the case in a Q&A document from the Church Alliance here.