Congress signed a new tax act into law in January that will have federal tax credit implications for 2018. To take advantage of the new credit, employers are urged to document their Family Medical Leave Act (FMLA) policies separately from their Paid Time Off (PTO) policies.
Many businesses are interested in learning more about this new incentive as the credit has a short two-year life span, applying only for 2018-2019 (although the credit could be extended by Congress). On Monday, April 9, 2018 the IRS released its first form of guidance regarding this new credit. This guidance was offered in a list of frequently asked questions on the new employer credit for paid family and medical leave (“Section 45S”). The FAQ addressed, in part, who qualifies for the credit; what is described as “family and medical leave” for purposes of this credit; and how the credit is calculated. In addition, the IRS plans to provide further guidance and more details on other outstanding questions on this credit.
Some Basic Guidelines:
Important guidelines as stated in the new tax act, Section 13403, Employer Credit for Paid Family and Medical Leave include:
- Eligible employers can claim a general business credit equal to a percentage of wages paid to qualifying employees on leave under the FMLA.
- To receive the credit, employers will need to provide at least two weeks of leave and compensate workers at a minimum of 50 percent of their regular earnings.
- The credit will range from 12.5 percent to 25 percent of the cost of each hour of paid leave, depending on how much of a worker’s regular earnings the benefit replaces. The government will cover 12.5 percent of the benefit’s costs if workers receive half of their regular earnings, rising incrementally up to 25 percent if workers receive their entire regular earnings.
- Employers can only apply the credit toward workers that have been employed at the organization for at least a year and who were paid no more than $72,000 in 2017. This wage ceiling will be adjusted for inflation going forward.
- Both full-time and part-time workers, if employed at the organization for at least a year, must be offered paid leave for an employer to be able to claim the tax credit.
- Employers must allow part-time employees to take a commensurate amount of paid leave, determined on a prorated basis.
Document, Document, Document
To reiterate, employers are required to have a written policy that provides at least two weeks of paid family and medical leave at no less than 50 percent of wages for full-time employees (and a prorated amount for part-time employees). The two weeks of paid leave cannot be provided as vacation, personal, medical, or sick leave.
It is important to note that paid family and medical leave must be a separate provision in the employer’s policies. Most company PTO policy statements will not qualify for the tax credit.
Take Action Now
Take the time now to work with a finance and accounting professional to ensure the proper policies are in place so that you can benefit from this new tax credit for leave taken during 2018 and 2019. Employers are also encouraged to review state and local leave legislation to confirm that there are no conflicts with the leave credit program.
Additionally, employers that provide paid family and medical leave for employees, who aren’t covered under the FMLA, must include a non-retaliation provision in the written policy to warrant that employees won’t be penalized for taking paid leave.
An Uncertain Future
The Society for Human Resource Management reports that although the duration of the credit isn’t long— just 2018 and 2019—employers hope that it could be made permanent.
In the absence of official guidance or proposed/interim tax regulations, employers and their advisors should make sure that they follow the guidelines listed above to take advantage of the tax credit.