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Benefit Plan Trends - Volume 61, Issue 1

Lundstrom Insurance Agency, Inc.

2205 Point Blvd., Suite 200
Elgin, Illinois 60123
Phone: (847) 741-1000
Fax: 847-428-8857

This publication intends to provide accurate information pertaining to the subject matter covered, however, it should not be considered as legal or tax advice. It is published and distributed with the understanding that neither the publisher nor Lundstrom Insurance Agency is rendering legal or tax advice. Before taking any action, you should always obtain specific advice and assistance from a competent attorney or tax advisor.

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A report covering plan design and legislative changes

Impact of The Tax Cuts And Jobs Act On Employee Benefits

The Tax Cuts and Jobs Act (TCJA) of 2017, which received final approval from both houses of Congress on December 20 and was signed into law two days later, is the first sweeping overhaul of the tax code in more than three decades. In addition to reforming the marginal rate structure and deductions for individuals, slashing the top corporate tax rate from 35% to 21%, creating a new 20% deduction for pass-through businesses, and zeroing out the Affordable Care Act individual mandate penalty starting in 2019, the law includes a number of provisions that specifically affect executive compensation and employee benefits. 
The new law makes a number of changes to executive compensation rules. Under Section 162(m) of the Internal Revenue Code, the deductibility for publicly traded companies of compensation paid to the CEO and the other three highest compensated officers other than the CFO was limited to $1 million annually, but this limit did not apply to performance-based compensation, including stock options and commissions. Starting in 2018, the exemption for commission- and performance-based compensation is removed, and the covered group of employees is expanded to include the CEO and the CFO, as well as the three other highest-compensated officers.
The TCJA also changes the rules for qualified equity grants to employees. Under prior law, a qualified employee was generally required to include stock-based compensation in his or her income in the year in which the employer transferred the stock to the employee, or in which there was no longer a substantial risk of forfeiture, regardless of whether the stock was tradable on an established securities market. Starting in 2018, the TCJA allows private companies to give employees the opportunity to defer taxation for up to five years on income attributable to stock received following a stock option exercise or settlement of a restricted stock unit if the stock is not tradable on an established securities market.
In addition, the legislation eliminated or restricted several employer deductions for employee expenses. Whereas under prior law, employers could provide moving reimbursements on a tax-free basis to employees; under the new law, the tax deduction for moving reimbursements is suspended through 2025 for most employees. Moreover, beginning in 2018, the TCJA repeals the business deduction for the cost of providing employees with parking or transit passes (worth up to $255 per month per employee in 2017), except as necessary for ensuring the safety of the employee. However, employees are still permitted to pay for their own mass transit or workplace parking passes using pretax income through an employer-sponsored salary deduction program. The qualified bicycle commuting reimbursement, which allows employees to exclude from their income qualified bicycle commuting reimbursements of up to $20 per qualifying bicycle commuting month, is suspended through 2025.
Under prior law, employee achievement awards for length of service or safety achievements could be excluded from an employee's income if certain conditions were met. Under the TCJA, such awards are deductible only if they qualify as tangible personal property starting in 2018. Thus, in most cases the deduction will no longer be available for awards in the form of cash, gift coupons or certificates, vacations, tickets to sporting or theater events, or similar items.
The TCJA also allows employers to claim a new Federal tax credit of between 12.5% and 25% for wages paid to employees who are taking leave under the Family and Medical Leave Act (FMLA). To be eligible for the credit, employers must pay employees on leave at least 50% of their regular earnings, and must provide paid leave to all qualifying full-time and part-time employees. However, this credit is available for 2018 and 2019 only.
In addition, the TCJA includes some modifications to the rules on qualified retirement plans. Under the new law, a traditional IRA that has been converted to a Roth IRA cannot be converted back to a traditional IRA. The legislation also extends the rollover period for defined contribution plan loan offset amounts that result from separation from employment by permitting these rollovers to occur as late as the due date for filing the employee's tax return for the year of separation. 

Retirement Savers Advised To Plan for Medical Expenses

Since Medicare and private insurance plans seldom fully cover the costs of medical care for retirees, individuals and couples planning for retirement should factor in the costs of medical care in determining the amount they need to save, a study on health expenses in retirement published by the Employee Benefit Research Institute (EBRI) recommended.
The study, "Savings Medicare Beneficiaries Need for Health Expenses: Some Couples Could Need as Much as $370,000, Up from $350,000 in 2016," was published in the December 20, 2017, issue of EBRI Notes. The article examined the amount of savings Medicare beneficiaries are projected to need to cover program premiums, deductibles, and certain other health expenses in retirement. Specifically, the study looked at the projected costs associated with premiums for Medicare Parts B and D, premiums for Medigap Plan F, and out-of-pocket spending for outpatient prescription drugs. 
The data used in the analysis came from a variety of sources, including the 2017 Medicare trustees report. The data were entered into a Monte Carlo simulation model that simulated 100,000 observations, allowing for the uncertainty related to individual mortality and rates of return on assets in retirement. 
The results showed that in 2017, a 65-year-old man needs $73,000 in savings and a 65-year-old woman needs $95,000 in savings if the goal is to have a 50% chance of having enough savings to cover premiums and median prescription drug expenses in retirement. If, however, the goal is to have a 90% chance of having enough savings to cover these costs, the man needs to save $131,000 and the woman needs to save $147,000. 
The findings further indicated that in 2017, a 65-year-old couple with median prescription drug expenses need $169,000 in savings to meet the goal of having a 50% chance of having enough savings to cover health care expenses in retirement. If, however, the couple aim to have a 90% chance of having enough savings to cover these expenses, they need savings of $273,000. In addition, the study found that a 65-year-old couple with drug expenses at the 90th percentile throughout retirement, and who want to have a 90% chance of having enough money for health care expenses, need to have $368,000 in savings. 
The study also looked at shifts in savings targets in recent years. The findings indicated that projected savings targets increased between 1% and 6% from 2016 to 2017, after decreasing from 2011 to 2014 and then increasing from 2014 to 2016. The authors pointed out that despite the increase in savings targets since 2014, the 2017 savings targets were lower than the savings targets in 2012 almost across the board. 
In addition, the authors emphasized that many workers should be saving more for health expenses than the amounts cited in this report, as the analysis did not factor in the total savings needed to cover long-term care expenses and other health expenses not covered by Medicare, or the fact that many individuals retire before becoming eligible for Medicare. The researchers also observed, however, that workers may need to save less than the estimated amounts if they choose to work past age 65 and continue to receive health benefits as active workers, thereby postponing enrollment in Medicare Parts B and D.

Generation Z Are Looking For Passion and Pride In A Workplace

While Millennials tend to seek jobs that provide stability and convenience, members of Generation Z who are just starting to enter the workforce are more concerned with following their passions and taking pride in the work they do, according to the findings of a survey conducted by the Lovell Corporation, a Millennial marketing and youth engagement agency.
The results of the survey of more than 2,000 individuals aged 14 to 37 across Canada were released on November 21, 2017. The main goal of the analysis was to define the characteristics of the emerging Generation Z (aged 14 to 23), and to look at how their career expectations and workplace values compare to those of Millennials (aged 24 to 37).
The survey asked respondents who were not yet working what type of occupation they wanted to pursue in the future. The career paths most commonly cited were entrepreneur (17.4%), public service (17%), and health care (15.4%). Broken down by sector type, 49.4% of these respondents said they expect to work in the private sector, 39.1% indicated they expect to work in the public sector, and 11.5% said they intend to work in the not-for-profit sector.
The respondents were also asked to rate the importance of 28 work value priorities, ranging from compensation to social environment and psychological benefits. The top priorities cited by Millennial respondents were job security, interesting work, convenient hours of work; while the top priorities cited by Generation Z respondents were interesting work, working for an organization they are proud of, and having work they are passionate about. 
When asked what career success means to them, both Millennial and Generation Z respondents rated financial security as the most important factor, followed by having a workplace culture that is positive and inclusive. According to researchers, a notable difference between the two groups of respondents was that members of Generation Z were more inclined than Millennials to say they consider having positive work relationships and a positive impact as determinants of career success.

Role of Employers in Providing Benefits Expected To Diminish

When it comes to providing health insurance and retirement benefits and ensuring the financial security of workers, Americans expect the role of individuals and government entities to increase and the role of employers to decrease over the next 10 years, according to results of a recent survey by the American Benefits Council.
The survey of 800 registered voters was conducted on November 5-9, 2017. When asked which entity they trust the most to provide them with high-quality health coverage, 43% of employed respondents said employers, while smaller shares cited the individual health insurance market (28%), the Federal government (13%), or state government (8%). However, when asked which entity they trust the most to provide them with opportunities to save for retirement, 56% of working respondents cited the individual financial services market, while 27% named employers and 9% cited the Federal government.
The working survey participants were also asked to identify the type of benefit they consider most important in the next 10 years. The top response was employer-provided health insurance coverage (35%), followed by employer-provided retirement benefits (31%). Much smaller shares of respondents cited student loan reimbursement and tuition assistance (7%), a financial and retirement planning program (7%), paid medical and family leave (6%), or paid vacation (5%).
When asked which entity they expect will play a larger role in providing individuals with health insurance and retirement savings opportunities over the next 10 years, more than half (52%) of respondents said they anticipate that individuals will play a larger role, while significant shares said they believe the Federal government (45%) or the state government (39%) will play a larger role. By contrast, only 29% of respondents said they expect employers will play a larger role, with the remaining respondents indicating they expect the role of employers to become smaller (35%) or stay the same (34%).
The survey participants were also asked to identify the tax incentives they view as most important over the next 10 years. More than one-quarter of respondents chose tax deferral on contributions to retirement plans (27%) or tax-free employer-sponsored health coverage (26%), while smaller shares selected the mortgage interest deduction (20%), a lower rate on capital gains (13%), or a deduction for charitable giving (9%). 
Moreover, when asked if they would prefer a compensation package that emphasizes quality benefits or more take-home pay, 60% of respondents said they would prefer more generous, high-quality benefits in exchange for lower take-home pay; while 34% of respondents indicated that they would prefer less generous, lower-quality benefits in exchange for higher take-home pay. 

The information contained in this newsletter is for general use, and while we believe all information to be reliable and accurate, it is important to remember individual situations may be entirely different. The information provided is not written or intended as tax or legal advice and may not be relied on for purposes of avoiding any Federal tax penalties. Individuals are encouraged to seek advice from their own tax or legal counsel. This newsletter is written and published by Liberty Publishing, Inc., Beverly, MA. Copyright © 2018 Liberty Publishing, Inc. All rights reserved.


2205 Point Blvd. Suite 200 | Elgin, IL 60123
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