Signed on December 22, 2017, the Tax Cuts and Jobs Act (US H.B. 1) created a federal tax credit (IRC § 45S) for employers that annually and voluntarily offer up to 12 weeks of paid family and medical leave to qualifying employees under a written policy. A qualified employee is someone who works for the employer for at least one year and who was paid no more than 60 percent of the highly compensated employee (HCE) rate during the preceding year ($72,000 for 2017 and 2018).
Starting in tax year 2018, employers will receive a tax credit between 12.5 and 25 percent of wages the employer pays to an employee who qualifies for and uses the federal Family and Medical Leave Act (FMLA). Specifically, the tax credit will cover 12.5 percent of the benefit’s costs if an employee receives 50 percent of their normal wages; the tax credit incrementally increases to a max of 25 percent if an employee receives their full wages while on an FMLA leave.
However, the key to this tax credit is an employer’s written policy, which must guarantee an eligible employee at least two weeks of paid time off for FMLA leave. Specifically, the required policy terms are as follows:
- Full-time qualifying employees are provided at least two weeks of annual paid family and medical leave;
- Part-time qualifying employees are provided a proportionate amount of paid family and medical leave based on expected work hours;
- The leave benefit amount is specified, for example, “employees are entitled to a leave benefit amount of at least 50 percent of normal pay”; and
- For employees not covered under the FMLA, a non-retaliation provision is included.
Importantly, if an employer provides paid leave as vacation leave, personal leave, medical leave, or sick leave, then it is not considered to be family and medical leave (subject to the credit) unless it is specifically taken for an FMLA leave. Alternatively, the credit is still available if an employee’s leave was not technically covered by the FMLA (for example, the employee works at a location not covered by the FMLA); however, the employer’s written paid FMLA leave policy must provide job protection for an employee taking leave who is not covered by the FMLA. Specifically, the policy must contain antiretaliation protections and antidiscrimination protections (these protections all go to the essence of the FMLA).
To be considered for the tax credit, the paid family and medical leave must be incorporated in the employer’s policies as a separate provision. Additionally, the consensus of HR professionals and labor attorneys is that an employer’s current paid time off policies will fail to meet the new law’s requirements; however, much is to be determined because the IRS has not released any guidance on the credit.
In the meantime, employers interested in taking advantage of this federal tax credit (only guaranteed to be in place for 2018 and 2019 because the law sunsets in 2020) should begin with a thorough review of their own policies and by drafting new policies compliant with this new law. Keep in mind this is a federal law and does not incorporate state or local laws, so consult with your state and local requirements to ensure compliance across the board.