Don’t “Leave” Money on the Table by Missing out on this New Tax Incentive
The IRS issued guidance on September 24, 2018 related to the new employer credit for paid family and medical leave. This credit was enacted as part of the “Tax Cuts and Jobs Act” (TCJA) passed late last year (please click here for our earlier article on this new credit). The IRS guidance in Notice 2018-71 (please click here for this Notice) was in a question and answer format, and the Service indicated they planned to issue proposed regulations on the credit later this year. Please note, this article addresses the new tax credit available for employers that offer paid family and medical leave. While the credit has connections with the “Family and Medical Leave Act of 1993” (“FMLA”), it does not replace any of the provisions of the FMLA. FMLA is still in effect, and the focus of this article is on new tax credit and not on the FMLA. Please contact your Sikich HR Professional if you have any questions related to the FMLA.
Overview of Credit
This credit was added by the TCJA last year to encourage employers to offer paid family and medical leave for their employees. Here is a brief overview of this new credit. To be eligible for this credit, an employer must have a written policy that meets the following conditions:
- First, the policy must cover all qualifying employees who: (1) have been employed for at least one year and have worked at least 1,250 hours; and (2) were paid no more than the designated amount. (The designated amount for the 2018 year is based on the wages paid to the employee by the employer in 2017, and this wage cannot exceed $72,000.) This requirement is for purposes of this new credit for paid family and medical leave. As noted above, the focus of this article is on the new credit and not on the requirements of FMLA.
- Next, the company policy must provide at least two weeks of annual paid family and medical leave for each full-time qualifying employee. Further, a proportionate amount of family and medical leave must be provided for each part-time qualifying employee.
- Additionally, the policy must provide for payment of at least 50 percent of the qualifying employee’s wages while the employee is on leave.
- Finally, if an employer retains employees that are not covered by the Family Medical Leave Act (“FMLA”), the employer’s policy must include language providing “non-interference” protections.
Thus, the employer’s written policy must contain that these various provisions be satisfied for the employer to be eligible for the credit.
IRS Guidance in Notice 2018-71
There were 34 questions included in Notice 2018-71. The guidance was broken down into the following five sections:
- Eligible Employer (Q1 – Q7)
- Family and Medical Leave (Q8 – Q11)
- Minimum Paid Leave Requirements (Q11 – Q21)
- Calculating and Claiming the Credit (Q22 – Q34)
- Effective Date
Here are some selected highlights from this FAQ issued by the IRS:
- The general rule is the new family and medical leave policy applies for the credit on the later of: (1) the date the policy was adopted, or (2) the effective date of the policy. There is an exception, however, for the 2018 year. For an employer’s first taxable year beginning after December 31, 2017, a written family and medical leave policy will be considered to be in place as of the effective date of the policy, rather than a later adoption date. This special rule for an earlier effective date applies if: (1) the policy is adopted on or before December 31, 2018; and (2) the employer brings its family and medical leave practices into compliance with the terms of the policy for the entire period covered by the policy, including making any retroactive family and medical leave payments before the end of the taxable year, or 12/31/2018 for a calendar year. [See also Question #6.] Thus, employers seeking to claim this credit for 2018 need to adopt their written plan by December 31, 2018 and make any 2018 retroactive payments by the end of the year.[space
- “Non-interference language.” As noted above, one of the requirements of the written policy is that it contains “non-interference language.” If an employer employs at least one qualifying employee who is not covered by the FMLA (including any employee who is not covered because he or she works less than 1,250 hours per year), the employer must include “non-interference” language in its written policy and comply with this language to be an eligible employer. The “non-interference” language must ensure that the employer will not interfere with, restrain, or deny the exercise of, or the attempt to exercise, any right provided under the policy, and will not discharge, or in any other manner discriminate against, any individual for opposing any practice prohibited by the policy. IRS Notice 2018-71 also provides in Question #3 the following sample language for an employer to use for “non-interference language” in its policy:
[Employer] will not interfere with, restrain, or deny the exercise of, or the attempt to exercise, any right provided under this policy. [Employer] will not discharge, or in any other manner discriminate against, any individual for opposing any practice prohibited by this policy.
- Next, Notice 2018-71 defines family and medical leave for purposes of the credit as:
- The birth of a son or daughter of the employee and to care for the son or daughter.
- The placement of a son or daughter with the employee for adoption or foster care.
- Caring for the spouse, or a son, daughter, or parent, of the employee, if the spouse, son, daughter, or parent has a serious health condition.
- A serious health condition that makes the employee unable to perform the functions of the employee’s position.
- Any qualifying exigency arising out of the fact that the spouse, or a son, daughter, or parent of the employee is a member of the Armed Forces who is on covered active duty.
- Caring for a covered service member with a serious injury or illness if the employee is the spouse, son, daughter, parent, or next of kin of the service member.
- Further, paid leave made available to an employee is considered family and medical leave for this credit only if the leave is specifically designated for one or more FMLA purposes (listed above); may not be used for any other reason; and is not paid by a State or local government or required by State or local law. This can be illustrated by the following two examples from Notice 2018-71:
Example A: Employer’s written policy provides three weeks of annual paid leave that is specifically designated for any FMLA purpose and may not be used for any other reason. No paid leave is provided by a State or local government or required by State or local law. Result: Employer’s policy provides three weeks of family and medical leave for the credit.
Example B: Employer’s written policy provides three weeks of annual paid leave for any of the following reasons: FMLA purposes, minor illness, vacation, or specified personal reasons. No paid leave is provided by a State or local government or required by State or local law. Result: Employer’s policy does not provide family and medical leave for the credit because the leave is not specifically designated for one or more FMLA purposes and can be used for reasons other than FMLA purposes. This is true even if an employee uses the leave for an FMLA purpose. (Note – if an employer offers other forms of leave that are not for FMLA purposes (i.e., for vacation, or other personal reasons), this other leave must be part of a separate benefit policy offered by the employer and not part of the written FMLA policy designed to take advantage of this new credit.]
- As described above, the requirements of the employer’s policy must be in writing. Notice 2018-71 also addresses whether an employer’s policy can require employees to work a minimum number of hours to be entitled to this family and medical leave. It states that to be entitled to the credit, the policy cannot “require an employee to work a minimum number of hours per year to be a qualifying employee. Until further guidance is issued, any requirement that an employee work a minimum number of hours to be a qualifying employee would not be viewed as a reasonable method for determining whether an employee has been employed for one year. The rules under the FMLA, which require an employee to work a minimum of 1,250 hours of service to be an eligible employee under the FMLA, do not apply for purposes of the credit.”
- As indicated above, the family and medical leave paid for by the employer must be at least 50 percent of the normal wage paid to the employee. The Notice defines “normal pay” as the wages normally paid to the employee for services performed for the employer. Overtime (other than regularly-scheduled overtime) and discretionary bonuses are excluded from wages normally paid. Until further guidance is issued, for employees who are paid (in whole or in part) on a basis other than a salaried or hourly rate, an employer must determine wages normally paid to the employee using the rules for determining regular rate of pay set forth in regulations issued under the Fair Labor Standards Act (FLSA).
- The notice addresses how the credit is calculated, including offering several useful examples. In addition, the IRS indicated that the credit is claimed by filing new IRS Form 8994, Employer Credit for Paid Family and Medical Leave, and IRS Form 3800, General Business Credit. These forms are included with the employer’s tax return. The IRS recently issued a Draft copy of Form 8994 and Instructions. Please click here for the draft version of the Form and click here for the Instructions.
- Finally, as noted above, the focus of this article is on the new credit for employers that offer paid family and medical leave. Employers must still adhere to federal and state specific FMLA regulations to ensure compliance from an HR perspective. Please contact your Sikich HR professional to address any FMLA issues.
Attracting and retaining employees is a never-ending challenge for employers today. Congress wanted to encourage employers to pay their employees for family and medical leave. Some employers already offer this paid leave, and now they need to account for the wages paid to qualified employees for this leave to claim this credit. Other employers may want to consider a paid leave policy to appeal to potential employees in today’s competitive labor market and receive a tax break to boot. Please contact your Sikich Employee Benefits consultant or Sikich tax advisor if you need any assistance with this new tax credit.