Review of Employee Benefit Files Should Include Tax Cuts and Job Act Provisions

From ChamberChoice

At this time of year it is less hectic in the Human Resource and Employee Benefit departments with the end of the year reports filed and open enrollment out of the way. It’s the perfect time of year for employers to pull out benefit records for review, confirmation and updating. Here are several tasks that employee benefit professionals should consider to help with their review.

Many employers use benefit confirmation statements once employees have completed their open enrollment elections. Although these statements are generally utilized for electronic enrollments, some employers provide them for paper elections also. During this “winter lull”, an employer should compare any confirmation statements to what the employer has on record for an employee’s benefit choices and dependents enrolled. Furthermore, an employer should ensure that payroll records reflect any premium changes because of the employee’s elections. This is especially important when an employee’s premium insurance elections are done on a pre-tax basis through an employer’s Section 125 plan. Section 125 rules provide that an election is irrevocable for the 12-month plan year unless there is an IRS permissible reason for a mid-year election change. There are some events not in the 125 rules that could allow an individual to make a mid-year election change, such as a mistake by the employer or employee, or needing to change elections to pass nondiscrimination tests. To make a change due to a mistake, there must be clear and convincing evidence that the mistake has been made. For instance, an individual might accidentally sign up for family coverage when they are single with no children.

Two popular benefits that employers provide their employees are group term life insurance and disability (both short and long term). Life insurance premiums are usually based on the age of the employee, while disability premiums are based on an employee’s wages. An employer should take advantage of “spring cleaning” to ensure that its records (payroll and invoices) reflect the age changes of employees as well as any pay increases that may have occurred at the beginning of the new year. Also, the employer should double-check these benefits for issues such as the removal of terminated employees, employee classification change which affects the amount of a benefit, and proper taxation. Depending on the employer’s policies, an employee may be able to have the premiums for disability insurance paid on a post-tax basis (instead of pre-tax) which enables an employee to avoid taxation upon receipt of a disability benefit.

Now is also a good time for employers to have employees review, and update if necessary, their beneficiary forms. Beneficiary designations are frequently used in retirement and life insurance plans to determine entitlement to benefits payable upon death of the participant. In the case of certain benefits subject to spousal protections, federal law imposes requirements on both the form and timing of beneficiary designations. Other types of beneficiary designations are a matter of plan design. A beneficiary designation which does not accurately reflect an employee’s intent can result in disputes following the death of a participant. There are a multitude of life situations that if a proper beneficiary designation is not on file, could be costly to an employer (think divorce, simultaneous death of the participant and beneficiary, or lost forms as examples). An employer may be required to defend a lawsuit, correct improper payments or find the proper beneficiary.

The passage of the Tax Cuts and Jobs Act (TCJA) in December 2017 includes several significant changes relevant to employers for payroll and employee benefits purposes. The new tax act was effective as of Jan. 1, 2018. In IRS Notice 1036 the Internal Revenue Service (IRS) published the income-tax withholding tables for 2018 reflecting changes made by the new tax law. The updated tables, which are to be used no later than Feb. 15, 2018, reflect the new rates for employers.

Additionally in the Notice, the IRS noted it is working on revising the Form W-4 to reflect the changes in the new law. The new Form W-4 can be used by employees who wish to update their withholding in response to the new law or changes in their personal circumstances in 2018, and by workers starting a new job. Until a new Form W-4 is issued, employees and employers should continue to use the 2017 Form W-4. Employers should visit the IRS website as to the release of 2018 W-4s.

During this review time, and due to the TCJA, besides employee benefit records, employers should take the time to review any of its policies which may be affected. Previously, employers were able to offer qualified transportation fringe benefits, including qualified parking, on a tax-favored basis (meaning not included in an employee’s gross taxable income). In 2017, the maximum monthly exclusion was $255. This benefit was seen as a “perk” to employees and employers could generally deduct these expenses. However, the TCJA repealed the employer deduction for qualified transportation fringe benefits. This repeal in no way affects a Qualified Transportation Plan an employer may have established under IRC Section 132. This type of plan allows for an employee to have contributions deducted on a pre-tax basis for qualified parking and transit passes.

In conclusion, during mid-winter there usually is some time for HR and Employee Benefit professionals to do a review of employee files. An employer should ensure that employee benefit elections are properly reflected in payroll deductions. Any premium increases due to wage increases or age increases of employees should be considered. Finally, the new tax act makes some changes that affect employer benefit policies and taxes.