Taking Advantage of the Federal Paid-Leave Tax Credit

The tax act signed into law at the end of December 2017 created a federal tax credit for employers that provide paid family and medical leave to their employees, beginning in 2018 and—at least as of now—ending at the finish of 2019. Despite the credit's modest lifespan, employers have shown interest in taking advantage of it for eligible paid time off (PTO) while it's available, in the hope that future legislation will make the program permanent.

As of the second week of January, the IRS and the Treasury Department had yet to post official guidance regarding the credit, such as frequently asked questions and answers, nor had they issued proposed or interim tax regulations. The lack of guidance leaves eligible employers and their advisors relying on the tax bill's language if they choose to move forward, with the expectation of claiming the credit when paying business taxes for 2018.

The Basics

As stated in the tax act's Section 13403, Employer Credit for Paid Family and Medical Leave:

• Eligible employers can claim a general business credit equal to a percentage of wages paid to qualifying employees on leave under the Family and Medical Leave Act (FMLA).
  

• To receive the credit, employers will have to provide at least two weeks of leave and compensate workers at a minimum of 50 percent of their regular earnings.
  

• The 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 can only apply the credit toward workers who have been employed at the organization for at least a year and who were paid no more than $72,000 for 2017. (This wage ceiling will be adjusted for inflation going forward.)
  

• Both full-time and part-time workers, if employed at the organization for at least a year, must be offered paid leave for an employer to be able to claim the tax credit.
  

• Employers must allow part-time employees to take a commensurate amount of paid leave, determined on a prorated basis.
  

"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. Your company's current PTO policy will not likely qualify for the tax credit," Pugh said.

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

What to Do Now

"Now is a good time for employers to ensure they have the proper policies in place to benefit from this new credit [for] leave taken in 2018 and 2019," said Tiana R. Seymore, an associate at law firm Fox Rothschild in San Francisco.

"It will take a while to get the logistics in place for tracking who is eligible and for employers to calculate the potential tax credit," said Kim Buckey, vice president of client services at Charlotte, N.C.-based DirectPath, an employee engagement, health care transparency and compliance company.

"While we expect additional regulations explaining and interpreting this provision to be published, think about how your company can take advantage of this provision in the future by reconsidering and redrafting paid-time-off provisions," Pugh advised.

Employers taking advantage of the paid-leave credit "will need to review their current leave policies and ensure that they meet the required guidelines for the program," said Bobbi Kloss, HR leader at Benefit Advisors Network, a Cleveland-based consortium of health and welfare benefits brokers.

Employers should also review state and local leave legislation to ensure that there are no conflicts with the leave-credit program. "The credit does not apply with respect to paid leave that is mandated under state or local law," noted Monique Warren, a principal in the White Plains, N.Y., law office of Jackson Lewis.

"Employers that provide paid family and medical leave for employees who aren't covered under the Family and Medical Leave Act also must include a nonretaliation provision in the policy," meaning that employees won't be penalized for taking paid leave, Warren added.

Related SHRM Articles:

How to Calculate the Paid Family Leave Tax Credit, SHRM Online Benefits, February 2018

Family Caregiving Trendsetters Share Their Tips, SHRM Online Benefits, January 2018

SHRM-Backed Workflex Bill Introduced in House, SHRM Online Employment Law, November 2017

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