• Christa Bierma says companies won’t likely pare back benefits offerings under new tax law
• Guidance not likely soon, except for changes to executive compensation deduction limits, she says
Guidance on the 2017 tax overhaul is coming soon, but not for employers still taking stock of its changes to employee benefits and compensation, according to a former attorney-adviser in the Treasury Department’s Office of Benefits Tax Counsel.
Christa Bierma, now a principal at Ernst & Young LLP in Washington, said that in the meantime, practitioners need to “be reasonable” in terms of how taxpayer-friendly they interpret the new law to be—though “‘reasonable’ can be in the eye of the beholder.”
The tax law—contrary to the GOP’s narrative of tax cut windfall trickling to lower- and middle-income workers—cut a litany of employee fringe benefit incentives and added one with narrow applications.
These adjustments left many practitioners confused and uncertain. But the 2017 tax act’s (Pub. L. No. 115-97) big headline-generating items, such as its international provisions, have crowded the top of the Internal Revenue Service’s list of guidance priorities.
“We just have to do our jobs,” Bierma told Bloomberg Tax in a recent phone interview, in which she answered five key questions on the tax law’s compensation- and benefits-related changes. “There are code provisions we’ve had to interpret before now when we didn’t have the guidance that we needed, and so we go and do our best to interpret the statute in light of the conference report and existing guidance.”
1. Are businesses pulling back their fringe benefit offerings, based on the tax law’s cuts to fringe benefit incentives?
In the wake of the law’s passage, companies like AT&T Inc. and Walmart Inc. announced that they would shift some corporate gains from the law to their employees—by raising wages, doling out bonuses, or beefing up 401(k) contributions. But what about smaller benefits now disincentivized by the law?
Employers aren’t ditching those now-more-expensive perks en masse, Bierma told Bloomberg Tax.
“With a few exceptions,” she said, clients aren’t cutting fringe benefits under the new law, as “they still haven’t really quantified the impact of these changes.”
Making those hypothetical cuts wouldn’t be a smart move on the public relations front, she added.
“They’ll have to figure out how to navigate the optics of that,” Bierma said. “There is a public narrative going on that the corporate rate cut will be shared with employees, and to drop a benefit is inconsistent with that narrative.”
On the chopping block late last year were several incentives provided by tax code Section 274, including employer deductions for qualified transportation fringe benefits, such as parking expenses and transit pass programs.
Other cuts to Section 274 affect meal and entertainment expenses. Changes to several other sections make moving for a new job, achievement awards, biking to work, and miscellaneous work expenses either included in income or no longer deductible for employees, though favorable treatment of some of those reimbursements and expenditures returns in 2026.
While many of these have had few ripple effects thus far, Bierma said she has seen some employers take a hard look at the parking benefits they offer, particularly if the entity is tax-exempt and now subject to expanded unrelated business income tax (UBIT).
An organization’s unrelated business income subject to UBIT now includes the costs of qualified parking benefits, a change potentially expanding the tax liabilities of organizations accustomed to paying little or no tax at all.
“A provision that converts an expense into unrelated taxable income came as a big surprise,” Bierma said. “Certain tax-exempt employers are very sensitive to paying UBIT, and organized with the understanding that they will never generate UBIT.”
2. What is the biggest ambiguity among the fringe benefit changes?
Terminology associated with the changes to Section 274 prompted semantic debates among practitioners, with some unsure of when the expenses on transportation are truly for “employee safety,” and therefore still deductible.
Others have been up in arms over the meaning of “entertainment” expenditures for purposes of that no-longer-deductible fringe benefit, which Bierma said was prompting the most confusion.
Half of certain meal expenses, for instance, are still deductible. What happens if an employee takes a client to a baseball game, and they buy hot dogs? If there’s some business purpose to the “entertainment” event, where do practitioners draw the line?
“How to categorize something, particularly a trip, that has a business purpose but also an entertainment element—that will be a challenge and I’m not sure we’ll get guidance anytime soon on that,” Bierma said.
Similar uncertainty clouds limits on parking and transportation, she added. That’s especially the case if an employer, for instance, pays to offer workers a parking garage, and uses some of it as a transportation fringe for employees and the rest for customers, or if a company leases its office and parking facility together and uses the latter as a transportation fringe, she said.
“How do you allocate that?” she said. “Presumably that is something we would get a method on from the IRS.”
3. What do practitioners think is ambiguous, but isn’t as unclear or unprecedented as it seems?
Practitioners riled up over the meals-and-entertainment debate, Bierma said, should check out IRS Publication 463, which says entertainment “includes the cost of a meal you provide to a customer or client, whether the meal is a part of other entertainment or by itself.”
“I tend to think that’s not a true ambiguity,” she said. Referencing the existing guidance, she added, “Observing that and observing that entertainment is not deductible is something our brains don’t want to do just yet.”
But while the publication “forecloses both the possibility that no meals are entertainment and the possibility that all meals are entertainment,” the issue may remain a sticking point, because it is “so fact-specific,” Bierma said.
4. How widely will the new five-year deferral for restricted stock units be used in practice?
The tax overhaul included a perk for not-yet-public companies that award their employees restricted stock units, allowing those employees to defer tax on those equity grants for five years under new Section 83(i). If the company is within five years of a liquidity event and growing more valuable, this helps qualifying employees maximize the amount of share value taxed at the relatively low capital gains rate.
The deferral, however, came with a lot of rules. Restricted stock units must be provided to at least 80 percent of employees, but not to certain executives or their immediate family members.
Managers must disclose the fact that employees with restricted stock units can make their Section 83(i) deferral election, and some practitioners worry that companies could be penalized if they meet the 80 percent threshold and managers failed to make a disclosure. Startups would more likely face this risk if they had just a few non-executive employees, practitioners said, as 80 percent could mean just several people given those equity grants.
But Bierma said that risk is far-fetched, given Section 83(i)’s narrow nature and that it’s “a provision lobbied for by organizations that have concerns about employees’ liquidity.”
“I would think that the organizations that asked for it are going to want to take advantage,” she said. “If you’ve got employees who you think need that flexibility, I would think that you’d make sure that your plans come in line with the provision.”
Still, use of the deferral should be rare, “based on what I’ve seen so far,” she added.
“It was meant to be a narrow provision that was only available to startup organizations that have this particular concern,” she said. “I do think some will be eligible and the fact that we’re not hearing that much about it may have to do with having to put out initial fires rather than dealing with a provision that is actually nice to have.”
5. When should practitioners expect guidance on the more uncertain provisions? Will they receive it by filing time?
As Bierma pointed out, “only a handful” of benefits and compensation items made it into the most recent update of the IRS’s Priority Guidance Plan, in which the agency outlined its top guidance objectives for a yearlong period ending June 30.
But there is one compensation and benefits item that did make the list and for which guidance could come as soon as this summer, Bierma said. The tax law amended Section 162(m) to expand the application of the $1 million limit on the deduction that corporations can take for certain executives’ annual compensation.
Guidance is urgent because some compensation agreements—a “written binding contract,” as the amended code puts it—that would normally be subject to the new rules are subject to the old ones if they were in effect on Nov. 2, 2017, Bierma said. Companies releasing financial statements need—or in many cases, needed—to know whether they could record a deferred tax asset, based on deductions they are or aren’t allowed to take.
It’s also clear exactly who in the IRS and Treasury Department has authority over that provision, Bierma said, “so practitioners encountering ambiguities knew who to call.” Other areas, such as the meals and entertainment tangle, she added, require “more coordination.”
As for the executive compensation deduction limits, Bierma said, “I do get the impression that that has been quite actively worked on and that we may see guidance this summer on that provision.”