IRS Releases Additional Guidance on Family and Medical Leave Tax Credit

On Sept. 24, 2018, the IRS released Notice 2018-71 which provides 34 FAQs on the tax credit available to employers who offer paid family and medical leave. As background, the 2017 Tax Cuts and Jobs Act (2017 Tax Reform) added Section 45S to the Internal Revenue Code to establish a new temporary tax credit for employers that voluntarily offer paid family and medical leave to employees.

Section 45S is intended to incentivize employers to offer family and medical leave on a paid basis. To be eligible for the new federal tax credit, an employer must have a written policy that offers at least two weeks (annually) of paid family and medical leave to full-time employees and a proportionate amount to part-time employees that’s based on the employee’s expected work hours. The paid leave must be available to all employees who have been employed by the employer for at least one year and who, for the prior year, had compensation of not more than 60 percent of the highly compensated employee threshold for the preceding year — for 2018, this means employees making more than $72,000. Extending the offer of paid family leave to employees with compensation above this threshold is allowable, but the credit would not be available.

A previous set of FAQs explained how to calculate the general business credit, which is equal to 12.5 percent of the amount of wages paid to a qualifying employee while on family and medical leave when the employer provides at least 50 percent of normal wages for up to 12 weeks per taxable year. The credit increases incrementally up to a maximum of 25 percent for employers that offer 100 percent of normal wages during a qualifying leave and is currently available for wages paid in taxable years beginning after Dec. 31, 2017.

Here are some highlights from IRS Notice 2018-71:

  • Transition Rule: The credit is generally available for wages paid in taxable years beginning after Dec. 31, 2017, and before Jan. 1, 2020. This transition rule allows eligible employers that set up a qualifying program (or amend an existing program) by Dec. 31, 2018 to claim the credit for eligible leave already provided during their 2018 tax year.
  • Leave for Tax Credit Purposes: Family and medical leave eligible for the credit is defined the same as leave as under FMLA. Generally, this includes an eligible employee’s leave 1) following the birth of a child or placement of a child for adoption or foster care, 2) for the employee’s own serious health condition, or 3) to care for a spouse, child or parent with a serious health condition. In addition, “qualifying exigencies” and care for covered service members with a serious injury or illness (as defined by FMLA) are eligible.
  • Employers Not Subject to FMLA: The tax credit is available to all employers, even those that are not subject to FMLA (for example, because the employer is not subject to FMLA or because the employee has not completed the requisite number of hours), as long as they offer certain FMLA-like protections to employees. These businesses must include “non-interference” protections in their written policies. Sample language is given in Q/A 3.
  • Additional Restrictions on Eligible Leave: To be eligible for the tax credit, leave must be specifically designated for an FMLA reason, may not be used for any other purpose, and may not be paid by a state or local government or required by a state or local law. Leave provided under an employer’s insured or self-insured short-term disability policy may be eligible, if it otherwise satisfies relevant requirements.

Notice 2018-71 also provides guidance on other topics – including who may claim the credit, and how to calculate and claim the credit – and provides several helpful examples. It also mentions that the IRS intends to issue proposed regulations on the credit, although a specific timeframe isn’t provided.

Employers that currently offer paid leave to full- and part-time employees should review the FAQs to determine if the current leave program qualifies for the tax credit. If an employer currently does not offer a paid leave program or the program offered does not meet the standard established under Section 45S, they should consider the tax benefits of a paid family and medical leave policy, keeping in mind that this program is temporary (at least currently). Employers may also want to work with outside counsel, since a review of current leave policies and written procedures would be required.

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IRS Notice 2018-71 »