On April 9, 2018, the IRS released FAQ guidance on the newly-created tax credit available to employers who offer paid FMLA 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 FMLA 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 is 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 preceding year, had compensation of not more than 60 percent of the highly compensated employee threshold for the preceding year — for 2018, that means employees making more than $72,000, as 2017 is the preceding year. Extending the offer of paid family leave to employees above the threshold is permissable, but the credit would not be available.
The FAQs add further detail as to what qualifies as "family and medical leave" for purposes of the credit. Section 45S mirrors the federal Family and Medical Leave Act (FMLA), to include one or more of the following:
- Because of the birth of a son or daughter of the employee and in order to care for such son or daughter;
- Because of the placement of a son or daughter with the employee for adoption or foster care;
- In order to care for the spouse, or a son, daughter, or parent, of the employee, if such spouse, son, daughter, or parent has a serious health condition;
- Because of a serious health condition that makes the employee unable to perform the functions of the position of such employee;
- Because of any qualifying exigency (as determined by the Secretary of Labor) arising out of the fact that the spouse, or a son, daughter, or parent of the employee is on covered active duty (or has been notified of an impending call or order to covered active duty) in the Armed Forces; or
- In order for the employee to care for a covered service member (if the employee is the spouse, child, parent, or next of kin of the service member).
If the employer provides paid leave as vacation leave, personal leave, or medical or sick leave – other than leave for one or more reasons above – that paid leave is not considered family and medical leave.
The FAQ also explains 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, is currently available for wages paid in taxable years beginning after Dec. 31, 2017 and is scheduled to expire after Dec. 31, 2019. Essentially, it’s available for employers that offer paid FMLA leave in 2018 and 2019.
The Section 45S tax credit is available to all employers, even those that are not subject to FMLA, so long as they offer certain FMLA-like protections to employees. Section 45S does not mandate that employers provide FMLA leave on a paid basis and does not change any aspect of FMLA. It also does not take into account any paid leave required by state or local law in determining the amount of paid leave the employer provides. Further, it is unclear how employers that pay in excess of State or local requirements may qualify for the credit under Section 45S.
The IRS intends to publish additional guidance on the credit. An example of the items to be addressed include, but are not limited to: when the written policy must be in place, how paid family and medical leave relates to an employer’s other paid leave, how to determine whether an employee has been employed for one year or more, the impact of state and local leave requirements, and whether members of a controlled group of corporations and businesses under common control are treated as a single taxpayer in determining the credit.
Employers that currently offer a paid leave opportunity to full-time employees (and part-time employees) should review the FAQs to determine if the current program qualifies for the available tax credit. If an employer currently does not offer an FMLA 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 procedures would be necessary.
Section 45S FAQs »