What You Should Know about the Tax Bill's Employer Tax Credit for Paid Family and Medical Leave
Update: On Sept. 24, 2018, the Internal Revenue Service issued a notice containing new guidance on the paid Family and Medical Leave Act tax credit for employers, answering questions on eligibility requirements. Get more details here.
The national tax reform package, signed into law by President Trump on Dec. 22, 2017, includes a provision allowing eligible employers that provide voluntary paid family and medical leave to claim a general business credit equal to as much as 25 percent of the benefit they pay to workers who take time off for reasons which would qualify for leave under the federal Family and Medical Leave Act (FMLA).
The FMLA permits employees up to 12 weeks of unpaid, job-protected leave per year, and requires that the company maintains their group health benefits during the leave. Workers can use the time:
- To address serious health conditions (their own or a qualified family member's);
- For the birth or placement of a child with the employee for adoption or foster care; or
- When dealing with certain exigencies arising when a covered family member is called to active military service.
Although FMLA applies to companies with 50 or more employees, the tax credit for paid FMLA is available to employers regardless of whether they are subject to the requirements under FMLA. This means that employers with less than 50 employees that offer paid FMLA would qualify for this credit along with those with 50 or more employees.
The credit in the new tax bill ranges from 12.5 percent to 25 percent of the wage replacement paid to qualifying employees during any period in which they receive paid family leave benefits. The credit increases incrementally from 12.5% by 0.25 percent for every 1 percent the employer's payment exceeds 50 percent of the employees’ normal wages paid.
The credit is available for 2018 and 2019 tax years.
Structure of the tax credit
The maximum amount of paid leave eligible for the credit is 12 weeks for any employee in any taxable year. For an hourly employee, the amount of the credit in the taxable year cannot exceed the normal hourly wage rate multiplied by the hours of work performed.
For a business to qualify for the credit, it must have a written policy that allows qualifying, full-time employees no less than two weeks of annual paid family and medical leave, and allows a proportional amount of leave for qualifying employees who are not full-time.
The written policy must ensure that the employer:
- Will not interfere with, restrain, or deny the exercise of or attempt to exercise any right that the policy provides; and
- Will not discharge or in any manner discriminate against any individual for opposing any practice prohibited by the policy.
Aggregation rules apply. This means that a business treated as a single employer shall be treated as a single taxpayer for purposes of the credit.
For a worker to qualify for paid leave benefits, they must:
- Be employed for at least a year; and
- Have in the preceding year earned no more than 60 percent of the compensation threshold for highly compensated employees, according to the Fair Labor Standards Act (FLSA). In 2017 and 2018, this threshold is $120,000. Consequently, the maximum wage an employee could be paid in the preceding year for 2018 credits would be $72,000.
Leave payments that are not credit-eligible:
- Amounts employers pay which is mandated under state or local laws.
- Paid time off that an employer provides as vacation, personal leave, or other medical or sick leave.
Many questions remain about paid leave credit
Employers need guidance from the Internal Revenue Service (IRS) on many paid leave issues, as well as forms to calculate and file for the credit. The IRS must set reporting requirements to determine which businesses are credit-eligible. Employers need answers to many questions, such as:
- How do they calculate the amount of normal wages paid? Is the figure based on an employee's pay history or a snapshot in time?
- What is considered a taxable year for purposes of the credit? A calendar year or a fiscal tax year? This is important for determining whether the credit's 12-week maximum falls within the taxable year.
- Which of a worker's hours on the job count toward actual services performed?
- How is the credit figured for salaried employees?
- How is the "preceding year" determined when calculating whether a worker's compensation exceeds the threshold for a qualifying employee? Is it based on the previous calendar year, a rolling year when the leave starts, or on other criteria?
- Is the assessment of compensation based on the leave start date? If the leave is intermittent, does it have to be continuously reassessed if the employee stays under the maximum compensation limit?
- How will the aggregation rule for employers apply to the credit?
- If the employer resides in a jurisdiction that requires paid leave, but the employer's policy is more robust than the federal requirement, is the excess above the requirement credit-eligible?
Tax credit likely to be used by businesses with established paid leave policies
Given that the paid family and medical leave tax credit is limited to two years, it's anticipated that it will be used primarily by employers that have already established voluntary paid leave programs.
We await further guidance from the IRS and the Department of Labor on this and other provisions included in the tax reform bill.