House of Representatives Releases Tax Reform Proposal – The Tax Cuts and Job Act
Thursday, November 2, 2017
The Republican leadership of the House of Representatives released today its proposal to reform the tax system, The Tax Cuts and Jobs Act (H.R. 1). While the focus of the tax reform proposal is on income tax relief for individuals and businesses and simplification of the tax code, items of interest to ECFC members are as follows:
No change to the exclusion for employer-provided health care benefits. Earlier versions of tax reform advanced by House Republican leadership had contained a dollar cap on the amount of employer-provided health care that could be provided on a tax-free basis. The proposal released today contains no change to the tax exclusion for employer-provided health care benefits.
- No change to the tax treatment of employee contributions to 401(k), 403(b) and 457 plans. There were media reports that the tax reform bill would place a cap on the tax deferral for employee contributions to 401(k), 403(b) and 457 retirement savings plans, but the proposal as released does not change the tax treatment of employee contributions to these retirement savings plans.
- No relief from the tax changes made by the ACA. The tax reform proposal does not provide any relief from the tax changes made by the Affordable Care Act (ACA), such as the tax on high cost health plans (the “Cadillac tax”), the cap on employee contributions to health FSAs, the requirement that drugs be prescribed to be reimbursed from an FSA, HRA or HSA and the increase in the penalty tax for disqualified distributions from an HSA.
- Elimination of Dependent Care Assistance FSAs. The tax reform proposal will eliminate the tax exclusion for dependent care assistance programs, meaning that dependent care assistance FSAs will no longer be available. Likewise, the exclusion for employer-provided onsite daycare may also be affected. These changes will be effective for tax years beginning after December 31, 2017.
- No provisions expanding HSAs. While Republican sponsored tax bills often contain provisions to expand health savings accounts, there are no such provisions in this bill. However, it is important to point out that House Ways and Means Chairman Brady and Senate Finance Chairman Hatch officially introduced the Healthcare Market Certainty and Mandate Relief Act (H.R.4200/ S. 2052) on Wednesday which increases HSA contribution limits to the out-of-pocket maximums imposed by the ACA.
Archer MSAs contributions eliminated. There will no longer be a deduction allowed for contributions to an Archer MSA. This isn’t a big deal since individuals with high deductible health plans generally choose to make their contribution to an HSA rather than an Archer MSA because HSAs were always more favorable than Archer MSAs.
- Transportation Fringe Benefits. Employers will no longer be able to deduct expenses for qualified transportation fringe benefits paid or incurred after December 31, 2017, and tax-exempt employers will be subject to unrelated business taxable income on those expenses. However, the proposal does not change the non-taxable nature of these qualified transportation fringe benefits. This means that employers will not be able to deduct any pre-tax transit and parking amounts, but they will remain tax advantaged for individual employees.
- Elimination of the itemized deduction for medical expenses. Some have raised concerns that the elimination of section 213 of the Internal Revenue Code (which include section 213(d), the definition of a qualified medical expense) would be eliminated, adversely impacting defined contribution health plans. The bill text makes it clear that this is not the case by moving section 213(d) to section 105(f) and all the cross-references in the Code appear to follow that change. This means that Health FSAs, HRAs and HSAs may still reimburse eligible medical expenses on a tax-favored basis.
The release of this bill is the first step in the complicated process of enacting tax reform legislation. The next step will be a markup of this legislation by the House Ways and Means Committee, which is currently scheduled for Monday, November 6. We will continue to monitor the process and advocate for ECFC’s priorities.
Below, are links to relevant materials on the draft legislation:
- Legislative text can be found here.
- A section-by-section summary can be found here.
- Charge and response can be found here.
- Policy highlights can be found here and here.
- Taxpayer examples can be found here.
- A discussion of family impacts can be found here.
- JTC Score on HR1 can be found here.