New Tax Credit for Paid Leave – Part 2: IRS Issues Helpful Guidance
As expected, the IRS recently issued additional guidance concerning the new paid leave tax credit codified as Code Section 45S. (You can read Part 1 of this series here.) The guidance, set forth in IRS Notice 2018-17, is presented in the form of 34 questions and answers. The questions and answers provide guidance to help determine which employees are "qualified" for purposes of the credit, how a year of service is determined, what constitutes wages, how the credit is calculated, and numerous other details. The questions and answers are highly detailed and this post does not provide a complete review of them. But here are three key items from the Notice that help answer the questions we have been receiving most from our clients:
- Written Policy Required. To be eligible to claim the tax credit, an employer must adopt a written policy that satisfies four requirements: (a) the policy must cover all qualifying employees; (b) the policy must provide at least two weeks of annual paid family and medical leave for each full-time qualifying employee and at least a proportionate amount of leave for part-time qualifying employees; (c) the policy must provide for payment of at least 50% of the qualifying employee's wages while the employee is on leave; and (d) if any qualifying employee is not covered by Title 1 of the federal Family and Medical Leave Act ("FMLA"), such as an employee working less than 1,250 hours per week, the policy must include "non-interference" protections. The written policy does not have to be contained in a single document. However, a single document (as opposed to a collection of separate pertinent policies) should be helpful to ensure compliance.
- Timing of Policy (Limited Time for Retroactive Amendments). In general, an employer's written policy must be in place before the paid family and medical leave for which the employer claims the credit is taken. And the written policy will be considered to be in place on the later of the adoption date or effective date. However, for an employer's first taxable year beginning after December 31, 2017, a written leave policy or an amendment to a policy will be considered to be in place as of the effective date of the policy (or amendment) if: (a) the policy or amendment is adopted on or before December 31, 2018; and (b) the employer brings its practices into compliance with the terms of the retroactive policy or retroactive amendment for the period covered by the policy or amendment, including making any retroactive leave payments no later than the last day of the taxable year.
- Qualified Leave. The written policy must provide paid leave that can be considered leave within the meaning of the FMLA. The types of FMLA leave that will qualify for the tax credit under Code Section 45S are:
- The birth of a son or daughter of the employee and in order 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 event that the Secretary of Labor approves by regulation arising out of the service of a spouse, son, daughter, or parent of the employee in the Armed Forces (including the National Guard and Reserves), if the family member is on active duty (or has been notified of an impending call or order to active duty).
- Caring for a covered military service member with a serious injury or illness if the employee is the spouse, son, daughter, parent, or next of kin of the military service member. The FMLA purposes are the purposes for which an employee may take leave under the FMLA
If a policy provides for paid vacation leave, personal leave, or medical or sick leave that is not considered FMLA leave, such paid leave is not eligible for the tax credit. For paid leave to be eligible for the credit, the leave (i) must be specifically designated for one or more FMLA purposes, (ii) may not be used for any other reason, and (iii) cannot be provided by a State or local government or be required by State or local law.[1] The following examples provided in the Notice illustrate the types of arrangements that may satisfy the FMLA requirement.
Example 1
Facts: Employer's written policy provides six weeks of annual paid leave for the birth of an employee's child, and to care for that child (an FMLA purpose). The leave 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.
IRS Conclusion: Employer's policy may qualify for the tax credit under section 45S, provided all other requirements of Code Section 45S are met (e.g., all eligible employees are covered).
Example 2
Facts: 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.
IRS Conclusion: Employer's policy may qualify for the tax credit under section 45S, provided all other requirements of Code Section 45S are met (e.g., all eligible employees are covered).
Example 3
Facts: 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.
IRS Conclusion: Employer's policy does not qualify for the tax credit under section 45S 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.
The Notice states that benefits provided under an employer's short-term disability program, whether self-insured or insured, may be characterized as family and medical leave under Code Section 45S if it otherwise meets the requirements under Code Section 45S. The Notice also clarifies that the rate of payment or period of paid leave does not have to be uniform with respect to all qualified employees and for all FMLA purposes. However, the minimum paid leave requirements must be satisfied with respect to each FMLA purpose for which the employer intends to claim the credit.
Employers having an interest in obtaining the new paid leave tax credit should begin to assess whether they may be able to qualify for the credit in 2018 and determine the actions they need to take to allow them to claim the credit this year.
[1] There is one narrow exception to these rules: where the policy provides paid leave for an FMLA purpose except for the fact that leave is also available to care for individuals not covered by FMLA (e.g., a grandchild). In this situation, while the leave paid for such non-qualified person is not eligible for the credit, leave paid for qualified individuals may be eligible for the credit.
