We recently published an article that covered the four areas of the Tax Cuts and Jobs Act (TCJA) that were specific to tax-exempt entities. But we wanted to explore the fringe benefits area in greater detail.
The TCJA states that certain fringe benefits – particularly transportation fringes such as transit passes, parking costs and on-site fitness centers – will be subject to unrelated business income tax if paid for by a tax-exempt entity. To avoid this tax, exempt entities can treat the costs associated with these fringes as taxable compensation to employees. Doing so will shift the burden of the tax to the employees, and will also cause there to be payroll tax. This additional layer of tax will likely result in a higher overall tax cost, although a portion of the burden will be on the employee.
There is another option for transit passes and parking benefits. Under this option, the tax-exempt entity would utilize a pre-tax cafeteria plan that would allow employees to set aside up to $260 per month as a pre-tax deduction from earnings, and then reimburse themselves for the cost of parking or transit passes. If an employee incurs both parking and transit costs, up to $520 per month can be set aside in a pre-tax account. To utilize this option, the tax-exempt entity would pay the employee the amount that it is currently paid for parking or transit passes, and the employee would have the option to treat the additional amount (up to $260 per month for each type of expenditure) as a pre-tax deduction. This type of pre-tax plan requires a plan document, and notice to employees about the existence of the plan. The plan can be set up at any time, though, and can be made effective immediately. Since it is still early in the year, this may help to mitigate any 2018 unrelated business income tax burden.
If you have questions about your organization’s fringe benefits under the new tax law, contact your CSH advisor.