Sexual Harassment Settlements and Confidentiality – Keep it quiet and you’ll lose the tax deduction.

There has been much ado about the confidential settlement of sexual harassment claims. And while no one was looking, Congress took a big step toward making confidentiality expensive. A little-known provision of the Tax Cuts and Jobs Act of 2017 eliminates the tax deduction for settlement payments made in conjunction with a confidential settlement.

Here is the language from the legislation: “No deduction shall be allowed under this chapter for (1) any settlement or payment related to sexual harassment or sexual abuses if such settlement or payment is subject to a nondisclosure agreement, or (2) attorney fees related to such a settlement or payment.” H.R. 1-76, Sec. 13307.
The law, which went into effect December 27, 2017, should make employers think twice before insisting upon a confidentiality clause when settling a sexual harassment claim.
The law also creates an important and unanswered question – namely, does it apply to a release given when no sexual harassment claim has been asserted? General releases that are signed in connection with a layoff or other separation could make a payment non-deductible if the release includes a confidentiality clause. This issue will remain murky until regulations or the courts weigh in. In the meantime, employers who want to be sure their deduction is preserved may consider carving out sexual harassment claims from a confidentiality provision, or eliminating the confidentiality provision entirely.