New Tax Credit for Paid Leave: What Benefits Professionals Should Know
The 2017 Tax Cuts and Jobs Act contains a two-year pilot project, developed by Senators Angus King (I-ME) and Deb Fischer (R-NE), that provides a tax credit to employers that offer at least two weeks of paid leave to low and moderate income employees. If your company already offers paid leave, it may be able to take advantage of the credit. If your company has been considering a paid leave policy, this may be the time to implement it.
The Family and Medical Leave Act of 1993 ("FMLA") generally requires employers with 50 or more employees to provide 12 weeks of leave during any 12 month period to employees for specific family and medical leave events (described below). FMLA leave is not required to be paid, but, an employer can choose to provide pay for some or all of the FMLA leave. Only 15% of private-sector and state and local government workers had access to paid family and medical leave in 2017, according to the Bureau of Labor Statistic's National Compensation Survey.
New Tax Credit
To entice employers to offer paid leave for FMLA events, the Tax Cuts and Jobs Act of 2017 allows an employer to take a tax credit if the employer provides paid family and medical leave to qualifying employees. The basic requirements of the law, codified as new Code Section 45S, are:
- Written Document: The employer must adopt a written policy that meets the specific requirements of Internal Revenue Code Section 45S.
- Critical Terms: The policy must provide at least two weeks of paid family and medical leave and the policy must pay at least 50% of the wages normally paid to the employee.
- Tax Credit Amount: The credit amount is a percentage of the wages paid and it starts at 12.5% and increases 0.25% for each percentage point by which the amount paid exceeds 50% of the employee's wages, up to a maximum of 25%. The maximum amount of leave eligible for the credit is 12 weeks.
- Eligible Leave: In order for family and medical leave to be eligible for the credit, the leave must fall into one or more of the following FMLA categories:
- the birth of a child and to care for the child;
- the placement of a child with the employee for adoption or foster care;
- to care for a spouse, child, or parent with a serious health condition;
- a serious health condition that makes the employee unable to perform the functions of his or her position;
- a qualifying exigency arising out of the fact that the spouse, child, 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
- to care for a service member or covered veteran who is the employee's spouse, child, parent or next of kin.
- Ineligible Leave: If an employer provides paid vacation leave, personal leave, or medical or sick leave (other than leave specifically for one or more of the purposes stated above) that leave is not considered family and medical leave eligible for the credit. In addition, any leave required by State or local law will not be taken into account in determining the amount of employer-provided paid family and medical leave eligible for the credit. Leave paid by a State or local government also is not eligible.
- Eligible Employees: The credit is only available for wages paid to employees who (1) were employed for one year or more, and (2) in the prior year, did not earn more than 60% of the applicable amount for "highly compensated employees" as defined under Code Section 414(q)(1)(B)(i) -- which means that for an employer claiming the credit in 2018, the employee must not have earned more than $72,000 in 2017.
- Small Employers: The credit is available to employers subject to the FMLA (i.e., in general, employers with 50 or more employees) as well as smaller employers.
- Two Year Availability: Unless extended, the credit is available for wages paid in the two taxable years of the employer beginning after December 31, 2017. It is not available for wages paid in taxable years beginning after December 31, 2019.
Action Items and Other Considerations
Employers may already be providing paid leave that could qualify for the credit. For example, self-insured disability plans may qualify. Therefore, employers should review their current leave programs and identify benefits that may qualify for the credit. For employers who do not provide paid leave, but are considering doing so, modeling the tax savings using the credit at different levels of paid leave (e.g., 50%, 75%, 100% of wages paid) is a logical next step.
To implement the credit, employers must have the systems in place to identify and track those employees who have worked at least one year, and who received wages in the prior year equal to or below the 60% limit. In addition, employers, particularly those operating in multiple locations, must identify and track leave that is being paid pursuant to State and local laws and exclude those amounts from the tax credit calculation.
The IRS has issued only one set of Q&As concerning the credit, however further guidance is expected. In particular, the IRS anticipates that guidance will address when the written policy must be in place, how paid "family and medical leave" relates to an employer's other paid leave, how to calculate whether an employee has been employed for "one year or more," the impact of State and local leave requirements, and how members of a controlled group are treated in determining the credit. For that reason, employers should be prepared to make adjustments in their paid leave programs as new guidance is issued.