IRS Issues First FAQs on Paid-Leave Credit

Some questions answered, though others await additional guidance

Stephen Miller, CEBS By Stephen Miller, CEBS April 19, 2018
IRS Issues First FAQs on Paid-Leave Credit

updated on May 4, 2018

When the IRS posted a set of frequently asked questions (FAQs) regarding the new employer tax credit for paid family and medical leave, it provided some assurance for employers that plan to take advantage of the credit but left many compliance questions unanswered. 

Additional assurance was provided in Tax Reform Tax Tip 2018-69, issued on May 4.

The employer tax credit, created by the 2017 Tax Cuts and Jobs Act, applies to wages paid between Jan. 1, 2018, and Dec. 31, 2019. 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.

To receive the credit, employers will have to provide at least two weeks of leave and compensate their workers a minimum of 50 percent of their regular earnings. The tax credit will range from 12.5 percent to 25 percent of the cost of each hour of paid leave, depending on how much of a worker's regular earnings the benefit replaces. 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.

Employers will be able to apply the credit only toward workers who earn below $72,000 per year, however. The credit does not apply if paid leave is mandated by state or local law.

"Employers interested in exploring this tax credit have been eagerly awaiting IRS guidance," wrote Jamie Weyeneth and Ruth Wimer, partners at law firm Winston & Strawn's Chicago and Washington, D.C. offices (respectively), in an online post. Although the FAQs "offer little in the way of new guidance," they provide a helpful summary of the credit eligibility rules, the attorneys noted. The FAQs clarify, for example, that an employer must reduce its deduction for wages paid by the amount of any tax credit for paid Family and Medical Leave Act (FMLA) leave. Also, wages used to determine any other general business credit may not be used in determining this credit.

As Weyeneth and Wimer explained, if an employer pays $50,000 in wages, which includes $5,000 of paid FMLA leave for which the employer received a $1,250 credit, the employer may deduct only $48,750 of the wage expense.

In the FAQs, the IRS said that it will eventually address additional information on the paid FMLA tax credit, such as:

  • When the written leave policy must be in place.
  • How paid family and medical leave relates to an employer's other types of paid leave.
  • How to determine whether an employee has been employed for one year or more.
  • The impact of state and local leave requirements.
  • Whether members of a controlled group of corporations and businesses under common control are treated as a single taxpayer in determining the credit.

Until additional guidance is issued, employers are left to interpret the tax code text describing the credit," Weyeneth and Wimer noted.

[SHRM members-only guide How to Develop and Administer Paid Leave Programs]

Beyond FMLA Requirements

The tax provision incorporates the definitions used in the FMLA "but does not tie the tax credit to covered employers as defined by the FMLA," explained Julie Pugh, a Cincinnati-based labor and employment attorney with the law firm Graydon.

"The catch here is that the employer is required to have a written policy that provides at least two weeks of paid leave for family and medical leave at not less than 50 percent of wages for full-time and a prorated amount for part-time employees," she pointed out. "The two weeks of paid leave cannot be provided as vacation, personal, medical or sick leave."

To be considered for the tax credit, "the paid family and medical leave has to be a separate provision in the employer's policies," she noted.

Tax Credit Considerations

Megan Holstein, a principal in the Denver office of Jackson Lewis P.C., recently advised employers offering paid family leave to consider these steps:

  • Review the company's existing policies that include voluntary paid-leave benefits (i.e., pay that is not required by law), such as a salary-continuation disability policy or a parental-leave policy.
  • Determine if the employer provides paid time off for any of the following reasons:

• Employee's serious health condition, including pregnancy.

• Parental leave or bonding leave.

• Care of a family member with a serious health condition.

• Care of an injured service member.

• A qualifying exigency that arises when a family member is deployed abroad on active military duty.

  • Determine the company's 2017 income replacement dollar amount that was used to pay out under one or all of the policies listed above. This is used to calculate a 2018 tax credit.
  • If the estimated calculation is a positive amount, then consult with counsel to ensure your policy complies with Section 45S before relying on the credit.

"Employers without existing voluntary paid-leave benefits may consider offering enhanced benefits, such as paid parental leave, to take advantage of the tax credit," Holstein noted. "It's worth looking into in order to take advantage of potential tax savings the company's voluntary paid leave program can generate."

Employers should also consider, however, that the credit sunsets at the end of 2019 unless reinstated by Congress.

SHRM Favors Voluntarily Offered Paid Leave

The Society for Human Resource Management (SHRM) supports efforts to help employees meet the dual 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 has endorsed the Workflex in the 21st Century Act now before Congress, which would provide more paid time off for employees and more predictability for employers.

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