QUESTION: Our company sometimes reimburses new employees for their moving expenses when they relocate to join the company. Now that there is no deduction for moving expenses, can we still reimburse moving expenses?
ANSWER: The Tax Cuts and Jobs Act suspended the moving expense deduction for individuals and the exclusion for amounts employers pay for deductible moving expenses (“qualified moving expense reimbursements”) for taxable years beginning after 2017 and before 2026. During that suspension period, only members of the Armed Forces on active duty who move pursuant to military orders and incident to a permanent change of station can still use the deduction and exclusion. Loss of those tax advantages affects the tax consequences for employees, but it does not prohibit employers from continuing to pay for employees’ moving expenses. In most cases, those expenses should continue to be fully deductible by employers. Loss of the exclusion might, however, make employer-provided moving expense benefits more expensive for your company. Here’s why.
Before the Act, qualified moving expenses paid by an employer were not subject to income or employment taxes if paid under the accountable plan rules. (Under those rules, an expense reimbursement is nontaxable if the expense has a business connection, the employee adequately accounts for the expense within a reasonable time, and any excess reimbursement is timely returned.) Tax-free moving expense reimbursements were not subject to the employer or employee portion of FICA tax.
During the suspension period, however, both the employer and employee portions of the FICA tax apply to moving expense reimbursements. In essence, employer-paid moving expense reimbursements will be treated as reimbursements made under a nonaccountable plan, e.g., a plan that gives employees an allowance for expenses, but does not require that employees account for their actual expenses or return any excess allowance. Moving expense reimbursements paid under a nonaccountable plan must be reported as wages and are subject to FICA and FUTA taxes. Withholding is at the same rate as for the employee’s other wages, unless the employer elects to treat the moving expense as supplemental wages.
If your company decides to continue helping new employees pay for their moving expenses, its total cost could rise (due to the FICA tax), but reimbursements will not be limited by the Code § 217 deduction. As a result, your company will have more flexibility to define reimbursable expenses, and could relax, or even eliminate, its substantiation requirements. Payments for unsubstantiated moving expenses could be provided as a separate item or as part of a signing bonus, but the tax consequences would be the same.
Forgoing substantiation altogether would simplify administration, but without substantiation your company will not be able to confirm that the payments were actually used for moving expenses, and your program cost could be higher than necessary. Thus, when deciding how to assist employees with their moving expenses during the suspension period, you will want to carefully balance convenience, cost, and the precedent this may set (especially if the old rules are restored after 2025).
For more information, see EBIA’s Fringe Benefits manual at Sections II.E (“Employee Business Expense Reimbursements”) and XVII.F (“Tax Treatment of Qualified and Nonqualified Moving Expense Benefits”).
Contributing Editors: EBIA Staff.