The Repeal of the Taxation of Qualified Transportation Fringe Benefits

Enacting Internal Revenue Code Section 512(a)(7) through the Tax Cuts and Jobs Act 2017, Congress moved into the uncharted territory of taxing nonprofit organizations through the taxation of expenses associated with providing qualified transportation fringe benefits to employees.  Seeing this as an equalizer to removing the deduction for the same benefits from for-profit employers, law makers determined having all employers pay the tax on the fringe benefits would be preferential to taxing the employees on the benefits. 

The resulting outcry was enormous especially when both the IRS and the Joint Committee on Taxation made it clear that the "taxable" expenses would include expenses associated with an employer provided parking lot even when the parking represented little or no real value to the employee.  Creating a tremendous record keeping burden as well as a tax burden, the outcry from the nonprofit community was swift and loud. 

As early as the summer of 2018, there were bills prepared and presented in both houses of Congress repealing the offensive provision.  In the fall of 2018, President Trump announced he would sign legislation repealing the provision, but with the election looming, no action could be achieved from Congress.  As 2019 progressed, it became clear sufficient support to remove the offensive provision existed, if it could just be included in legislation that Congress could agree to pass.  The mission was accomplished on December 20th when President Trump signed the appropriations bill including the provision to remove Code Section 512(a)(7).  The tax provision is not only ended, it is as if it never was.  Nonprofit organizations who complied with the tax reporting should look for IRS guidance on how to obtain refunds of previously paid taxes associated with qualified transportation fringe benefits.

Unrelated Business Income - More Than Income These Days

The tax-exempt community has long been immune from many of the tax provisions meant to raise tax revenue from the business community by determining certain expenses are not tax deductible.  For example, businesses may deduct only 50% of the amount spent on business meals and certain expenses for business autos may be limited.  Since tax-exempt entities do not calculate tax on their regular operations, these rules have never affected them.  

The Tax Cuts and Jobs Act of 2017 (the Act) provides lower tax rates on business activities, but it also reduces several deductions for various business expenses.  One of the deduction eliminated by the Act is the elimination of deductions for expenses paid by an employer for qualified transportation fringe benefits provided to employees. 

Qualified transportation fringe benefits, defined by Internal Revenue Code (IRC) Section 132(f), include: 

• Commuter transportation in a commuter vehicle; 
• Transit passes; 
• Qualified parking at regular work facilities; and 
• Qualified bicycle commuting reimbursement.

Prior law allowed these benefits to be provided to employees, within certain limitations, tax-free and allowed the employer to deduct the costs of the benefit.  Therefore, the benefits were a win-win for the employer and the employee. The Act still allows for an employer to provide the benefits to employees tax-free, but the employer may no longer deduct the cost of the benefit for federal income tax purposes.  (Since most state tax laws follow federal tax law, the expenses are also not deductible for state income tax purposes.)  

How does this affect the tax-exempt community?  The Act also enacts a new provision for unrelated business taxable income creating a taxable event when a tax-exempt employer pays these same expenses for its employees.  Since other employers will pay tax on the costs of the benefits through the disallowance of the deduction for the benefit, the tax-exempt employers will join them in paying tax on the costs. IRC Section 512(a)(7) now states that any expenses incurred for qualified transportation fringe benefits and are disallowed by IRC Section 274, will be included in unrelated business taxable income (UBTI).  [The provision in IRC Section 512(a)(7) also includes costs associated with on premises athletic facilities, but the Act did not create a corresponding disallowance under IRC Section 274 for these expenses.  Therefore, at this time, the costs for on premises athletic facilities are escaping the effect of IRC Section 512(a)(7).]

Example

A church, in a large metropolitan downtown area, has limited parking facilities.  Because of limited parking facilities, employees must pay to park in nearby facilities.  The church reimburses its 10 ministers for these parking expenses.  The parking expenses are $260 per minister, per month, so the full parking reimbursement is a qualified transportation fringe benefit and is excluded from the ministers’ taxable income. (The parking benefit is limited to $260 per month.)  Because of the new provisions, the church must file Form 990-T reporting the cost of the benefit, $2,600, as UBTI.  After the standard deduction of $1,000 allowed in computing UBTI, the net taxable income is $1,600. The church's tax owed is $336 (calculated at the corporate rate of 21%). 

While the provision does not affect most churches, it may affect churches in metropolitan areas providing parking or transit passes to employees.  Churches providing these benefits must understand the benefit has limitations on the tax-free amount available to employees and the potential of the benefit to create an income tax and a requirement to file Form 990-T.  The new provisions are effective for amounts paid or incurred after December 31, 2017.

The essence of the law requires someone to pay tax on the transportation costs.  Therefore, the tax burden may be shifted to employees by opting to include the value of the benefits in employees’ taxable income.  Employers, both taxable and tax-exempt, must decide who will bear the new tax burden, the employer or the employee. 

Reimbursements for Individual Health Premiums & the Myths of the 21st Century Cures Act

Background

Among my church clients, one of the most difficult changes from the Affordable Care Act (ACA) was the end of an employer's ability to reimburse employees for individual health insurance premiums.  Due to the financial and administrative costs of  group health insurance, many small churches and nonprofits reimburse employees for individual health insurance plans.  Pre-ACA law allowed this reimbursement and the reimbursement was nontaxable to the employee. 

Under the ACA, such a reimbursement plan became an ineligible health plan subject to fines of $100 per day per participant.  The reimbursement  still isn't taxable, but the plan creates fines to the employer.  In response to the ACA rules, many small employers stopped providing for insurance for employees, a result contradictory to the purposes of the ACA. Other employers weren't aware of the rule changes and continued with plans violating the ACA.  (In 2015, the IRS provided relief to employers violating these particular ACA rules by relieving them of any penalties through June 2015.  The 21st Century Cures Act provides this relief through December of 2016.)

The Myth

In December of 2016, The 21st Century Cures Act (the Act) was signed containing a provision allowing for small employers to reimburse for individual health plan premiums.  Unfortunately, the "Cures Act" did not cure the problem for many small employers, but instead created a myth that the problem was cured.  Once the Act was signed, word spread that individual health insurance premiums could once again be reimbursed and all the prior ACA created issues were rolled back.  Throughout the church and nonprofit community, it was assumed the old ways could be resumed (or continued for those who failed to understand the ACA.)  

The Truth

It is true that the Act provides for a method of providing health insurance through the reimbursement of individual health insurance premiums.  It is not true that the Act allows employers to return to the good ole days of pre-ACA practices.   

The Act created the Qualified Small Employer Health Reimbursement Account (QSEHRA) to provide for an employer's reimbursement of individual health insurance plan premiums and other medical expenses.  The QSEHRA is removed from the ACA's definition of a "group health plan".   The QSEHRA does not return to the days of old, and churches/nonprofits desiring to utilize the it must understand its rules and limitations.

A QSEHRA is for:

• employers with fewer than 50 full time equivalent employees (FTEs); and 
• employers not offering a group health plan.

The QSEHRA must:

• be a written plan;
• include notification of the plan to employees 90 days before the beginning of the year or for new employees, their eligibility for the plan.  IRS Notice 2017-20 granted relief from this provision for plans starting in 2017.  (There has not been any guidance issued to date, so the penalty relief may be suspended until such guidance is issued.) Penalties for failure to provide the notice are $50 per participant not receiving the notice;
• be employer funded - no elective employee salary deferrals may be used;
• reimburse for substantiated medical expenses and premiums;
• limit reimbursements to annual amounts of $4,950 for an individual or $10,000 for a family plan.   If greater amounts are provided, the additional cash must be for unrestricted purposes or a non-qualifying group health plan not complying with the ACA is created;
• provide for reimbursements on the same basis for all employees.  There may not be variations for position, length of service, etc; 

Employees should be aware that an insurance policy obtained from an exchange may be reimbursed, but the employee must notify the exchange of the employer reimbursement and cannot claim the reimbursed portion of the premiums for the premium credit.  This educational information is required to be part of any notice given to the employees regarding the plan. 

For churches/nonprofits desiring to institute a QSEHRA, steps should be taken to establish the plan in writing and to provide notice to the employees of the plan for 2018.  While notice requirements may be temporarily suspended, it is best to distribute a notice in accordance with the initial instructions to provide relevant information to employees.  Plans reimbursing individual health insurance premiums, outside of a qualifying QSEHRA, should be terminated immediately as such plans are currently subject to ACA penalties. 

Section 139 Plans - Relief in the Midst of Disaster - An Avenue for Employers to Help Employees

As Hurricane Harvey has devastated our Texas coast, we at Sommerville & Associates, P.C. are praying for all of those affected.  As is evidenced across the country, everyone is looking for ways to reach out and alleviate any part of the pain and suffering of those affected by the hurricane and the corresponding floods.  As the rains continued to fall and the waters rose last week, the estimated recovery costs continued to climb.  No one knows what the cost will be, but it is now anticipated the cost will surpass the recovery costs of Hurricane Katrina.  

Many of our churches and nonprofit clients have been directly affected by Harvey, as have many of their employees.   With less than 15% of the affected residences insured for floods, much of the costs of rebuilding will come from personal resources supplemented by federal resources.  The nonprofit community has a deep desire to assist those in need, both employees and others, and many resources are already flowing into the nonprofit community.  

Nonprofit organizations, especially churches, may operate benevolence programs to assist the community with special needs.  Many programs are already established and provide a structure available to assist with needs arising from Harvey.  Generally recipients are not taxed on payments from a regular benevolence program, but an organization's employees may not receive tax free payments from a benevolence program due to limitations placed on such programs through IRC Section 102.

With limitations on assistance from benevolence plans for employees, there aren't many avenues available for employers to offer tax free assistance to employees.   After the 9/11 terror attacks, Congress decided to provide an avenue for employer to employee assistance in the case of certain disasters.  

Qualifying Disaster Relief – IRC Section 139

Congress enacted IRC Section 139 in 2002 as a means of clarifying the taxable nature of assistance payments received to victims of a qualifying disaster.  

Qualifying Disaster

A qualifying disaster is one that is the result of or related to: 

• a terrorist action;
• a Presidential declared disaster area; 
• accident involving a common carrier; or
• any other IRS declared qualifying disaster. 

Victims of one of these disasters create a qualifying charitable class allowing assistance to be provided to the victims.  This charitable class may include employees, their family members and major donors.  While any employer is allowed to set up, these plan are especially advantageous for nonprofit employers who have the ability to raise funds for the plans from donors. 

On August 26, 2017, President Trump signed a major disaster declaration for those portions of Texas that Hurricane Harvey severely affected. The designated counties include: Aransas, Bee, Brazoria, Calhoun, Chambers, Colorado, Fayette, Fort Bend, Galveston, Goliad, Hardin, Harris, Jackson, Jasper, Jefferson, Kleberg, Liberty, Matagorda, Montgomery, Newton, Nueces, Orange, Refugio, Sabine, San Jacinto, San Patricio, Victoria, Waller, and Wharton. This list can continue to grow, and we recommend that employers view the most accurate list at this FEMA website: https://www.fema.gov/disaster/4332#.

Qualifying Payments

Payments for these expenses are qualified disaster relief payments:

• reasonable and necessary personal, family, living, or funeral expenses incurred because of a qualified disaster;
• reasonable and necessary expenses for the repair or rehabilitation of a personal residence due to a qualified disaster (a personal residence can be a rented residence or one you own); and
• reasonable and necessary expenses for the repair or replacement of the contents of a personal residence due to a qualified declared disaster.

Further, recipients of  qualified disaster relief payments do not have to account for all of their expenses, as long as the payments received are reasonably expected to be equal to the expenses the recipients incurred.

There are two key limitations to Section 139. Qualified disaster relief payments do not include:

• payments for expenses otherwise paid for by insurance or other reimbursements; or
• income replacement payments (i.e., payments of lost wages, lost business income, or unemployment compensation).

Setting Up the Plan

Organizations desiring to set up a Section 139 plan should determine: 

• who will qualify for the assistance; 
• how assistance can be requested (an application is recommended);
• what type of assistance will be granted; and 
• how the assistance will be paid or provided.

Summary

While a Section 139 plan doesn't provide for all instances where an employer may desire to assist an employee, it is certainly an avenue available to providing assistance during some of the most trying times a community may face.  For more information regarding these plan or a sample application, please feel free to contact me at elaine@nonprofit-tax.com or find more information and a sample plan at http://www.wkpz.com/help_for_employers_addressing_disaster.php.