In a competitive market, hospitals and other health care providers often offer fringe benefits (compliant with Stark Law and the Anti-Kickback Statute, of course) to attract talented physicians. As part of a recruitment package, in-demand physicians have come to expect employers to offer to pay for their relocation expenses.
Before Congress passed the Tax Cuts and Jobs Act of 2017 (“TCJA”), qualifying employer-paid moving expenses were excluded from the employee’s gross income under §132(a)(6) of the Internal Revenue Code (“Code”). The Code defines a “moving expense” as the reasonable expenses of transporting the employee and family (including lodging, but not meals) along with their household goods and personal effects from their old home to the new one. That is a significant benefit, especially if a new hire requires a cross-country move, which can easily cost around $10,000.
Under the TCJA, a tax-free employer-paid move is a thing of the past. Section 132(g)(2) of the Code suspended the exclusion from income through 2025. After January 1, 2018, if an employer pays or reimburses an employee for moving expenses, the payment or reimbursement must be included in the employee’s gross income. The employer-paid or reimbursed moving expenses will now not only be subject to federal income tax, but will also be subject to withholding, Social Security and Medicare taxes, federal unemployment insurance taxes, and applicable state and local taxes.
Two exceptions must be noted. First, § 132(g)(2) of the Code provides that active duty members of the military who move pursuant to a military order and incident to a permanent change in station may still report moving expense reimbursement as nontaxable on their W-2’s. Second, as provided in IR-2018-190 and Notice 2018-75, reimbursements paid by employers after January 1, 2018, for moving expenses incurred in a prior year are not subject to federal income or employment taxes so long as the employee did not deduct them for the prior year. According to the IRS, employers who treated the reimbursements or payments as taxable income to the employee under these circumstances can follow normal employment tax adjustments and refund procedures.
This development does not mean that employers are likely to stop paying moving expenses, especially when it comes to sought-after physicians, specialists, and certain other highly trained healthcare workers. Whether you are a physician being recruited, or an administrator looking to make a new hire, it’s important to remember this issue when negotiating your agreements. The simplest solution is likely to gross-up the employee’s compensation to cover the added tax liability. As always, however, developments in the Code invite creative minds to come up with equally creative solutions to these types of problems. When negotiating your physician agreements, it is always wise to consult with experienced healthcare or employment attorneys, as well as your tax professionals.