New IRS guidance answers employers' questions about the tax credit businesses can take, beginning this year, when they give eligible employees paid family and medical leave.
The credit,
created by the 2017 Tax Cuts and Jobs Act, is in effect for tax years 2018 and 2019, although Congress could extend it.
Employers that set up qualifying paid-family-leave programs or amend existing programs by Dec. 31, 2018, can claim the credit retroactively to the beginning of the employer's 2018 tax year.
Notice 2018-71, posted Sept. 24, gives detailed guidance on the credit in a question and answer format. The notice clarifies how to calculate the credit and the application of special rules and limitations.
Employer Eligibility
Under new
Section 45S of the Internal Revenue Code, employers that voluntarily offer qualifying employees up to 12 weeks of paid family and medical leave annually under a written policy may claim a tax credit for a portion of the wages paid during that leave.
For tax year 2018, employers can apply the credit only toward workers who were paid less than $72,000 by the employer in 2017.
To receive the credit, employers must:
- Provide at least two weeks of paid time off (PTO) for employees taking leave that would otherwise be unpaid under the Family and Medical Leave Act (FMLA). Section 45S uses the definitions for leave eligibility found in the FMLA but the tax credit applies to all employers, not only those covered by the FMLA.
- Compensate their workers a minimum of 50 percent of their regular earnings.
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.
The credit does not apply if paid leave is mandated by state or local law.
Earlier Guidance
Rules for claiming the tax credit were initially explained in
FAQs that the IRS
posted in May. Those FAQs clarified, for example, that an employer must reduce its deduction for paid wages by the amount of any tax credit it received for paid FMLA leave. Also, wages used to determine any other general business credit may not be used in determining this credit.
New Clarification
Notice 2018-71 "provides more detailed guidance on how employers can calculate the credit in various situations, such as when leave is paid by a third party or the employer is part of a controlled group of corporations,"
explained William Hays Weissman, an attorney in the Walnut Creek, Calif., office of Littler.
"Code section 45S wasn't very clear about what to do with disability or PTO leave that someone takes for a FMLA-qualifying purpose,"
wrote attorney David LeFevre of ERISAfire Benefits Compliance Solutions. "The statute is ambiguous, and prior IRS guidance just regurgitated the statute. IRS Notice 2018-71 resolved the ambiguity: Not only must the leave be taken for a FMLA-qualifying purpose, the leave policy must specifically be for FMLA-qualifying purposes and nothing else," which excludes paid sick days for minor illnesses.
An employer doesn't have to provide PTO for
every type of FMLA leave to claim the credit, however. It can provide PTO for parental leave but not for a serious medical condition, for instance. As HR consultancy Mercer put it, "An employer can obtain the credit even if its paid leave policy doesn't cover all FMLA purposes or provide the same benefit or duration for all types of FMLA leave."
A policy that provides paid leave for one or more FMLA-type purposes—including a short-term disability policy—"will suffice if all other conditions are met," Mercer noted. "A policy can even extend more generous benefits or longer leaves for some FMLA-like purposes than others." For example, an employer's policy can provide:
- 10 weeks of leave at 100 percent pay to bond with a new child, but only six weeks of leave at 60 percent pay to care for a family member with a serious illness.
-
Two weeks of FMLA-type leave at 50 percent pay for all qualifying employees and an additional two weeks of FMLA-type leave at 50 percent pay for qualifying employees at the company for five or more years.
The notice also added a number of other technical requirements, but the IRS "threw employers a bone," LeFevre noted. "Current leave policies can be amended retroactively to conform to the technical requirements of Code Section 45S, so long as the amendment is adopted by Dec. 31, 2018."
Any employer offering paid family and medical leave "should carefully review the notice to determine whether, if it has such a plan in place and desires to use the credit, [the plan] is compliant and if not, whether to [make it compliant]," Weissman advised.
A new draft IRS Form 8994 for employers claiming the credit
is expected soon.
Public comments on Notice 2018-71 may be submitted until Nov. 23, 2018.
[SHRM members-only Express Request:
Tax Credit for Paid FMLA]
SHRM Favors Voluntarily Offered Paid Leave
The Society for Human Resource Management (SHRM) supports efforts to help employees meet the demands of work and personal needs and believes that employers should be encouraged to voluntarily offer paid leave to their employees. To achieve this aim, SHRM supports
the Workflex in the 21st Century Act now before Congress, which would provide more paid time off for employees and more predictability for employers.
Related SHRM Articles:
IRS Issues First FAQs on Paid-Leave Credit,
SHRM Online, April 2018
How to Calculate the Paid-Leave Tax Credit, SHRM Online, February 2018
Taking Advantage of the Federal Paid-Leave Tax Credit,
SHRM Online, January 2018