Episode 8: Comp & Benefits: The OBBBA Breakdown

Transcript

DEVIN TENNEY

On this episode, we'll look into some of the biggest changes in the world of compensation and benefits, including those from the OB three, as well as some of those from the first and second SECURE acts. We welcome Dave Graf, a leader in the Private Client practice here at Forvis Mazars who specializes in qualified retirement plans, to join me to talk about this subject, which is very near and dear to my heart.

DEVIN TENNEY

From your one stop for tax updates and analysis. I'm Devin.

IRIS LAWS

And I'm Iris.

DEVIN TENNEY

It's Tuesday, August 19th and this is Tackling Tax with Forvis Mazars.

Before we get started with our much-anticipated guest, we always like to start our show with what we call our Fast Four stories that we think might be most impactful to you. So, let's dive right into our Fast Four stories of the week.

IRIS LAWS

For our first story of the day, we're going to tackle technical correction. So, a slew of technical corrections to the OB three, or OBBBA, could be expected in the coming months. Members of Congress have returned to their states and districts as Congress is on recess until September 2nd, with many addressing concerns of their constituents about the act. Senator James Lankford of the Senate Finance Committee was quoted saying, whatever bill goes out, no matter how long or short it is, there will be something.

You'll go, oh, that was an unintended consequence of it. Especially with the complexity of tax law. So the number of scope of these technical corrections will largely be determined once the JCT publishes its Blue Book covering the Act.

DEVIN TENNEY

You know, I certainly look forward to the Blue Book. I still have occasional nightmares about the Tax Cuts and Jobs Act and assume that you've probably had a similar experience. Iris.

IRIS LAWS

Oh, you know it. It's a lot to dig through, but also some really good guidance there. So this, just like TCJA, was a major piece of tax legislation, so it's going to take years before most of the wrinkles are ironed out.

DEVIN TENNEY

Absolutely. For our second story we're going to talk about the revolving door at the IRS commissioner post. So, the IRS is in search of its eighth IRS commissioner for 2025, after President Trump removed Billy Long, who only served in the position for less than two months.

IRIS LAWS

Wait, sorry, did I hear eighth? Is that right? The eighth commissioner?

DEVIN TENNEY

Yeah, you certainly did. And considering that this has historically been a five-year appointment, seeing this many commissioners in a single year is certainly out of the norm. Now, moving forward, Scott Bessent, Secretary of the Treasury, has stepped into the role as acting commissioner while he and others begin a search for the eighth and hopefully final IRS Commissioner of 2025.

Now, Long was not the only notable departure; as the head of the Department of Justice Tax Division, Karen Kelly has also stepped down. Now, this really shouldn't come as too much of a surprise because last month it was announced by DOJ officials that they have a plan to eliminate the tax division and relocate its attorneys to other divisions within the department.

So, it's not necessarily a big surprise. And I also don't necessarily anticipate someone filling that role.

IRIS LAWS

Well, our show is Tackling Tax, but here we also tackle tariffs. So, another week, another update on tariffs. To start, the US and China have agreed to pause tariff hikes on each other for an additional 90 days, halting a significant tariff increase by both sides. Reciprocal tariffs have also gone into effect on dozens of countries, with rates ranging from 10 to 41%. Additionally, the de minimis exception will end for all countries effective August 29th.

DEVIN TENNEY

Iris, if you don't mind if I interject quickly. The de minimis exception, can you maybe provide some context on what that is and what this means?

IRIS LAWS

Sure, historically, imported goods valued at or under that $800 mark have fallen under a de minimis exception from customs clearance and duties. So, up until now, the exception has been in place for global imports, with the exception of those from China, which was lifted earlier in May. So, however, starting August 29th, all imports, regardless of their value, will be required to go through customs clearance and face duty rates.

DEVIN TENNEY

Last but not least, let's talk about the new provisions, no tax on tips and overtime. So, the IRS recently announced that there's not going to be any changes in 2025 to withholding tables or to certain information returns for that year. They primarily stated that they're not going to be making these changes because they want to avoid disruptions to tax filing and also give the IRS enough time to implement these changes effectively.

I mean, with the Billy Long news, I understand why they probably want that additional time. So, this announcement also said that they are working on guidance for 2026. And that's going to include, you know, new withholding tables and also how employers should report tips and overtime to their employees. So, the IRS is going to coordinate with employers, payroll providers, and tax professionals to help kind of ensure a smooth transition here.

On another front, Democratic lawmakers from Nevada have shared a letter with the Treasury and IRS, urging them to support a number of changes to these laws on no tax on tips and overtime. Basically asking for a lot of things, but they include auto gratuities as qualified tips, which are currently excluded under the provision.

IRIS LAWS

What is an auto gratuity? I mean, I think that probably could be a lot of things, right?

DEVIN TENNEY

Yeah. So, the new law requires that tips be qualified tips for this purpose of the deduction. They have to be voluntary. So, if we have something like a service fee or automatic gratuity where there's like a set percentage that’s automatically charged to your bill, typically when you have parties of a certain size, that's not considered voluntary in this case.

And so, those service charges are not, and auto gratuities are not, going to be deductible as a qualified tip. Now the Nevada lawmakers have also put a request in to make the provision permanent, as it currently is set to expire in 2028. They've also asked to have a more broad definition of occupations that are applicable to claim this the tips deduction.

And additionally, and I found this one important, they've also asked for joint filers to be able to claim $25,000 each. Currently, it's capped at $25,000 in total, regardless if you're a single filer or joint filer. So, kind of like we have with overtime, where you have $12,500 per person, up to $25K when you're filing joint, they want to see that here. So the cap would actually be $50K for joint filers.

This segment we call Planning Insights where we examine current events in the tax world and some of the resulting strategies. Today's insight, as I had mentioned earlier, is going to be on a topic near and dear to my heart, and that's because it's my primary area of specialty, Comp and Ben. And that's particularly in the more onerous rules that govern executive comp and non-qualified deferred comp, like 409A and 280G and a bevy of other areas that fall under that Comp and Ben umbrella.

DEVIN TENNEY

Now, one area that I rarely touch is that of qualified plans. But fortunately, the firm has a very strong practice in this area, which grew even stronger recently with the addition of our guest for today's episode, Dave Graf. Dave, welcome to Tackling Tax.

DAVE GRAF

Devin, thank you very much. It's an honor to be here with you guys and look forward to talking qualified plans, the Internal Revenue Code, ERISA, all those things that employee benefit nerds like myself enjoy talking about.

DEVIN TENNEY

Yeah, I think you pretty much have to be a nerd to work in this area, even more so than tax in general. But, you know, Dave, we work at Forvis Mazars, a public accounting firm, but you have a very nontraditional background and pathway into public accounting. So I'm wondering, can you maybe give us a little bit of an introduction about yourself? You know, how did you kind of grow up in this area, and end up at the firm? And what are you really doing here at Forvis Mazars?

DAVE GRAF

Sure. Devin, I'm happy to do so. And it's kind of funny how, you know, the circle of life works. Once upon a time, I was actually working at a big eight accounting firm in Coopers and Lybrand and going to law school at night and working my way through and got finished. And then the decision was either stay with Coopers or go out and work at a law firm. And it was really a tough decision because Coopers, frankly, until I wound up here, it was the best place that I had ever worked.

And ... but I went ahead and chose the path of going to a law firm. And that's what I've done now for the last, or had up until Forvis, 40 years, give or take. And, you know, I got towards the end of my career, with the law firm that I was with for over 30 years here in Little Rock, Arkansas, and, you know, I just missed people that kind of had my same values. And at the top of that list is basically, you know, the concept of integrity always trumps economics. And so, I remember here, 10-15 years ago, met a gentleman by the name of Chris Doolittle here in our Little Rock office.

And we got to know one another through one of his family’s retirement plans that had all sorts of trouble with the IRS, the Department of Labor, and then we'll throw in the Pension Benefit Guaranty Corporation as well. All three of those governmental agencies, and was able to pull his family's plan out of the ditch and retain the tax qualified status and whatnot.

And so, I reached out to Chris and said, hey, you know, I'm at the stage in my career where I'd really like to end it on a good note, and I'd like to do so with a bunch of guys that are like you. In other words, a bunch of Chris Doolittle's. And so, you know, we talked and talked and talked some more and the process was, you know, multiple months, but, at the end of the day was offered the opportunity to work with the retirement plan consulting group.

And people asked me, Dave, how do you like it over there? Basically, even though I'm not technically practicing law anymore, I continue to consult on all sorts of qualified retirement plan issues, including the preparation of documents which we just got approved to go to the FT William document package, which is going to be a real improvement for us as far as how we can offer our plans to clients.

But, people ask me, well, hey, how's that, what's it like being over it for us as essentially a consultant as opposed to an attorney? And I'm just really blessed. Devin. I mean, the way I characterize it is: within our group of 12, it's 12 CPAs and one lawyer, as in me. But, I'm with an all-star group of professionals that are Hall-of-Famers as human beings.

And so just, tremendously blessed to be a part of Forvis Mazars and this is where I'm going to wrap up my career here, with the team here.

DEVIN TENNEY

Now, so, you work in retirement planning on the qualified side. And that may be the most active area in terms of like, new legislation and changes and really kind of what's evolving in the world of Comp and Ben. So, I was, you know, wanting to talk a little bit about what you're really seeing specifically with the SECURE and SECURE 2.0 Acts and kind of touching on this theme of Roth-ification, you know, what is that? You know, and also what motivated Congress, to, you know, put these two huge acts into place in the first place?

DAVE GRAF

Yeah. Great question, Devin. When I first started, in the area of employee benefits, and I'm not going to admit how long ago that was because it's been a while. But, you know, the focus was more so on, defined benefit pension plans that companies were there to kind of guide you through the path of your career.

And then, in addition to giving you a gold watch, would provide you with a pension slash annuity for the rest of your life. And the problem with pension plans, generally speaking, is that oftentimes, they're not completely funded for various reasons. And so you wind up, actually, that type of plan becoming a money pit on the employer side.

And so over time, the focus was to, hey, let's shift this responsibility for retirement. More so from the employer's responsibility to the employees. And so, that was where the advent of the 401(k) plan came in. And these most recent pieces of legislation, those are geared towards adding on to making it more so the employee's responsibility to save for their retirement.

So you've got all sorts of provisions here. With the intent to have the employee shoulder this burden as opposed to the employer. And I guess one good thing for me, Devin, being in the employee-qualified plan world, is that, you know, I kind of refer to, the SECURE Act and the SECURE 2.0 Act, as the full employment act for employee benefit professionals like myself.

Because there's getting ready to be a ton, and I mean a ton, of work coming up over the next couple of years in terms of amendments and restatements, good-faith amendments, decisions as to are we going to add a Roth feature so that your highly paid individuals who make $145,000 or more can do catch-up contributions? I mean, there's just a ton of different benefit changes coming down the pike.

DEVIN TENNEY

Would you say that a lot of these changes were beneficial for retirement saving, planning? You know, as far as I'm aware, if I recall correctly, the SECURE stands for Setting Every Community Up for Retirement Enhancement, and that, this was, kind of, designed to encourage both employers and employees to participate. Is that what you've seen based on the provisions that came out with the 1.0 and then SECURE 2.0?

Has it really been a good motivation? Has it added too much complexity? And, you said there's some big stuff coming. If you, you know, had to share just a couple huge insights that our listeners probably should be aware of that are upcoming; what would you want to share?

DAVE GRAF

Yeah, that's a very good question, Devin. It's kind of funny that both of these acts, kind of behind the scenes, the intent was to, quote unquote, ”simplify” things. And, I think they kind of whiffed on that. I mean, the SECURE 2.0 Act has over 93 different qualified plan changes in there.

And, frankly, a lot of them are pro-employee, if you would, in terms of various types of distribution options, which include, like, a small distribution amount for emergency situations. There's domestic abuse situations. Just a lot of little small distribution features. There's a qualified birth or adoption feature where, if an individual is about to have a new addition to the family, that they could pull out up to $5,000 from their retirement account and use that to pay birth or adoption expenses.

And it also gives them the opportunity, if they so choose, to repay that money back to the plan. So, it would never be taxable. But, you know, honestly, yeah. You're not going to see many employers add any of those features. But what you are going to see are a couple features that are going to surprise people.

And probably at the top of the list is this whole to-do about long-term part-time employees. And, prior to the SECURE Act, and I've got several hospitals where we've got a number of employees that they don't work 1,000 hours in the 12-month period. And we honestly at the employer-level like that because we didn't have to bring them into the 401(k) plan or make employer matching contributions or profit-sharing contributions, for that matter.

But, what the SECURE Act said was that, hey, if you're a long-term part-time employee, and back in 2000, under the SECURE Act, if you had three years of where you had 500 or more hours of service, the employer had to let you come into the plan and start making 401(k) contributions. Now, they were not required to make employer matching or profit-sharing contributions, but they had to let these people come into the plan for 401(k) purposes.

And then the SECURE 2.0 Act expanded on that and said, hey, you know, it's no longer going to be three years. If you've had two years of 500 or more hours of service, you've got to come in for 401(k) purposes. And that new rule takes effect in 2004 or 2025. So, you know, you're going to have some people surprised by that.

Another rule that, frankly, is going to catch a lot of new plans by surprise is that and this, again, is effective as of 1/1/2025, if you have a new plan and an employer that has more than 10 employees, they have to automatically enroll all of their employees in this new 401(k) plan. There's no ability to let them decide whether they want to come in or not.

And with these automatic enrollment features, employers are going to have to, at a minimum, start withholding 3% of pay. And that goes up each year by a percent and ultimately could get as high as 15% of pay. So, you're going to have a lot of additional administration in terms of, because there's going to be employers that a lot of these employees are not going to want to participate, but they're going to have to proactively go out there and get some sort of piece of paper back, saying that they don't want to participate in the plan.

And then of the trifecta, if you would, of surprise type changes is one coming up, Devin, in 2026 and this is a really convoluted provision, but it's one that was thrown into this SECURE 2.0 Act, frankly, to generate some tax revenue and keep people happy. But it has to do with this Roth-ification, if you would, of catch-up contributions.

And what the law says is that any employee, it's not a highly compensated employee, it's a highly paid individual, i.e., an HPI as opposed to an HCI or HCE, I'm sorry. Well, and what it says is that, if you want to do catch-up contributions and just to back up for everybody on the podcast. Anyone who's 50 or above can elect to, in addition to their 402(g) limit of 401(k) contributions, which is $23,500 here in 2025, you can do an additional $7,500 if you're 50 or above as a catch-up contribution.

And if you're actually between the ages of 60 to 63, you can do an additional $3,750. It's called the super catch-up. And that's $11,250 if you fall within any of those years. But beginning 1/1/2026, if you make more than $145,000, your catch-up contributions, you can still do them but they have to be in the form of a Roth after tax contribution.

So, there are a number of plans out there right now that do not offer Roth. And so, if they're going to want to keep their higher paid people happy. And again, it starts at $145,000, not $160,000, which is the quote unquote “highly compensated employee” threshold. These contributions will have to be on a Roth after-tax basis.

So, we're getting ready to have a lot of fun here going into the fourth quarter, because there's going to be a lot of plans that, in order to continue with catch-up contributions that do not have a Roth provision, they will have to be amended before January 1st, 2026, to offer this catch-up feature to their higher paid individuals.

And, you know, I've had a lot of questions come up on this about, well, okay, we're going to do this Roth feature. We're just going to have it apply to these people that make $145K or more. And that's a big absolute no. If you're going to bring the Roth feature in, it has to be offered to everybody to avoid any type of nondiscrimination issues.

DEVIN TENNEY

Well, Dave, I'd say that's all incredibly insightful, but certain people may have a different definition of fun than you.

DAVE GRAF

Yeah, I hear you.

DEVIN TENNEY

That may be why you work in this area.

DAVE GRAF

Well, Devin, as I mentioned, there were 93 changes in the SECURE 2.0 Act, and we covered maybe three of them. So, there's 90 left. But let's go on to some exciting things that are happening in your world, in particular with respect to the OB3 legislation.

DEVIN TENNEY

Yeah, absolutely. And, you know, there certainly were not 93 changes in OB3, but there were a fair amount that I think are worth discussing. And, you know, I talked earlier on this episode about the no tax on tips and no tax on overtime provisions. You know, they were a campaign promise from Trump that ultimately did make it into the Act. And they both provide for above-the-line deductions for individuals that make certain amounts.

Now there are limits on who actually can take this deduction and the amounts that can be taken, as well as the source of those funds. If you're going to have tips, for example, those tips must be limited to, like, voluntary amounts.

Qualified overtime, on the other hand, is going to be based on a definition of the Fair Labor Standards Act. And so, it's also limited only to an actual specific amount of overtime. And not all overtime wages, but only the additional amount over their regular pay. Some things to really know about these provisions that I think stand out is there's a phase out. So, if you make over $150K or $300K joint, you are going to be phased out. It's going to be $100 per thousand dollars over that limit. And these deductions are only available through 2028.

Now, again, this is an employee deduction on their tax return. This is not an income exclusion. So, employers are going to have to report these amounts on forms W-2 and still do all the applicable withholding, at least in ‘25.

That may change next year when we get these new withholding tables. But, for now, they're still going to have to report all of these amounts. And there's going to be additional reporting from employers. The problem is we just don't have any guidance. So, the employer is going to have to state the occupation that they're in to ensure that it's a qualifying occupation.

They're going to have to identify and provide the actual amount of qualified tips or qualified overtime. There's additional information that's going to have to go out there. And there's a lot of questions right now on how they're going to do that. We don't have that guidance, particularly for independent contractors; as this amount flows through to a 1099 NEC, there's nowhere to put it. On the form W-2, some places that it could go, but ultimately we are looking at a lot of questions on the actual practical application of these.

One thing I just want to point out about the OB3 is that it did not, unlike the TCJA, it did not bring in a ton of new provisions. A lot of it was just doing extensions of TCJA provisions that were about to expire.

And so a couple examples of those were some fringe benefits, moving expenses, and bicycle commuting. So there used to be an income exclusion for those two amounts. If you met certain requirements that the TCJA suspended, OB3 came in and it made the suspension permanent. So, if you were hoping to get, you know, moving expense after 2025, it's not going to be the case. That is now permanent. Now, on the flip side, still talking about fringe benefits.

It did do some good things. So, for example, educational assistance employers have the ability to deduct up to $5,250 of educational expenses from an employee's wages. And a handful of years ago, one of the things that was added to the definition of a qualifying educational expense was student loans and other items related to student debt.

And so, OB3 came in and it made that provision, you know, permanent, which was very nice, because now that's going to continue to cover student debt. It also added something regarding these new Trump accounts. There is a $2,500 exclusion that an employer can put into a Trump account for a child. Obviously, there are some requirements here, but that is also a new benefit.

It's not something that used to exist. So, there is an opportunity now for employers to continue to provide new fringe benefits with these Trump accounts. Now, I will point out there's a question that you may have encountered on whether that $2,500 is annual or is that a lifetime cap? And the way it's written currently, if you do an express reading of it, it looks like a lifetime cap. But I think what we're going to see that this is actually an annual limitation. So, they're probably going to end up doing a technical correction for that amount.

Another thing that you're going to see is they made some expansions to the employer-provided childcare credit, and the dependent care assistance program. So, there is more potential benefit under both of those programs.

And they also expanded the paid family and medical leave credit. So, there were some additional benefits that came as a result of those. Now, last but certainly not least is executive compensation and it hit two areas. To start, it hit section 162(m). That's the $1 million deduction limitation for public companies for renumeration paid to what they call covered employees. Now, this is a topic that's fairly interesting because it's been evolving over the years, especially with the TCJA because the covered employee pre-TCJA was just your CEO and your top three most highly compensated officers. CFOs were expressly excluded. TCJA came in and it changed a lot of things. It really expanded the scope and coverage of this limitation.

One of the things that it hit though, was covered employees. So, it added the CFO into that. So now you had potentially five or you did have five covered employees per year, but another provision that it added is once covered, always covered. So, if you were one of those five individuals, one of those five covered employees at any point, you would continue to be a covered employee in perpetuity for that company.

And then, again, the American Rescue Plan Act made a pretty significant change. It's going to start in 2027 by adding five more covered employees. So, now you have a floor of, at minimum, ten covered employees per year. And what's even worse with this is, the old rules only apply to officers. These new rules apply to all employees. So, what we're going to see here is a scenario where you have extremely highly compensated employees that weren't officers and were never having the deduction on their wages limited by 162(m). All of a sudden they're going to get pulled in. We're talking, like, salesmen, people that have really high earners with big commissions, etc. So now we've had another change with the OB3 because they've expanded the potential pool of who can be considered a covered employee by incorporating controlled group rule. So, this is much more expansive than the 1504 affiliated rules that they did have.

So not only are more people now going to start becoming covered employees, we have a bigger pool of people that we're going to have to consider. And, last but not least, on the topic of covered employees, a very similar provision. It's kind of a hybrid of 162(m), but it only applies to tax-exempt entities is the section 4960 excise tax. Now, that's a 21% tax that is imposed on tax-exempt orgs that, again, pay renumeration in excess of $1 million. So, there's a lot of similarities there.

And they also had a cap of five covered employees. But that is now changed. They've eliminated the cap entirely. So, we're not talking about a floor of ten. There is no floor. Anybody that has compensation over $1 million, except for some expressly excepted individuals like medical professionals, are going to be subject to this cap.

And so that's another huge limitation that we're going to be seeing as there is no cap. There potentially could be a significant number of employees of the largest tax-exempt entities that are going to be subject to this 21% excise tax because of their compensation over $1 million dollars.

So, there's a lot more. But I want to keep it at that. I think those are probably the primary provisions that are impacting comp and ben out of the OB3. There are a lot of questions, there's a lot of gray area. There's a lot of stuff that was not answered. So, we probably are going to start seeing technical corrections. And other guidance is going to start hopefully clarifying a lot of these items for us.

Dave, I think that wraps up our episode. I just want to thank you again for joining us. Been very excited that you're here at the firm, and I really look forward to working with you.

IRIS LAWS

Each episode will bring you what we call a Focused FORsight of the week, an article or recording that might be of interest to you. This week's Focused FORsight is an article from our one and only Devin Tenney called “Compensation and Benefits Reconciliation Changes 101.” Lots of insights that build off of what you heard today. You can always access our FORsights on the WNTO website or the forvismazars.us website more broadly.

DEVIN TENNEY

And that's our show. Thank you all for joining. This was a really fun one. Remember to subscribe and listen in for our next episode of the podcast. Until next time.

ANNOUNCER

The information set forth in this podcast contains the analysis and conclusions of the panelists based upon his, her, or their research and analysis of industry information and legal authorities. Such analysis and conclusions should not be deemed opinions or conclusions by Forvis Mazars or the panelists as to any individual situation as situations are fact-specific. The listener should perform their own analysis and form their own conclusions regarding any specific situation. Further, the panelists’ conclusions may be revised without notice, with or without changes in industry information and legal authorities.

Related FORsights