The Tax Cuts and Jobs Act (TCJA) amended Section 217 of the Internal Revenue Code (Code) to suspend the deduction for moving expenses from 2018 through 2025. This change has a subtle yet meaningful impact on many tax-qualified retirement plans.
When testing qualified plans for compliance with the Code’s coverage and nondiscrimination requirements, plans are required to use a definition of “compensation” that complies with Code Section 414(s). The default definition of compensation in Section 414(s) is “compensation” as it is defined in Code Section 415(c)(3), which includes nondeductible moving expenses, but excludes deductible moving expenses. The TCJA makes all moving expenses “nondeductible,” which means that all moving expenses should be included in compensation for plans that use the default Section 415 definition for testing purposes.
Or does it? The moving expense deduction has been suspended, not eliminated, so it’s not clear whether this change affects Section 415 compensation. By way of analogy, fringe benefits provided by an employer qualify for the “working condition fringe” exclusion in Code Section 132 only if the expense would have been deductible by the employee under Code Section 162. The TCJA also suspended miscellaneous itemized deductions, which means employees currently cannot deduct unreimbursed business expenses under Section 162. But IRS Publication 15-B indicates that the working condition fringe exclusion remains in effect, despite the suspension. Plan administrators should consult with counsel to determine how best to proceed in light of this uncertainty.
More generally, plan administrators should review their plan definitions of “eligible pay” and testing “compensation” on an annual basis. Employers often use dozens of earnings codes to describe the compensation they pay to employees. These codes change frequently, and often plan administrators are unaware of the change. We’ve seen many plans apply an incorrect definition of eligible pay for extended periods of time, resulting in costly and time-consuming corrections to make all participants whole. We’ve also seen plans forced to redo their nondiscrimination tests for prior years because an incorrect definition of “compensation” was used in the past. An annual review of these issues could save plan administrators a lot of trouble down the road.
If you have questions about your plan’s definition of “compensation” in light of these considerations, please reach out to the author or your Morgan Lewis contact.