Paid Leave Can Contribute to an Employer’s Bottom Line

The Tax Cuts and Jobs Act (TCJA), P.L. 115-97, 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 in 2018 and 2019. On September 24, 2018, the IRS issued updated guidance in Notice 2018-71 (the Notice) on Internal Revenue Code section 45S, the business tax credit for employers that provide paid family and medical leave (the Credit). Under the Credit, which is in effect for calendar years 2018 and 2019 only, an employer that provides paid family and medical leave may claim a credit based on an employee’s qualifying wages. The Credit applies to employers that grant employees earnings less than $72,000, in 2017, at least two weeks of annual paid family and medical leave for full-time employees, and a proportionate amount for part-time employees where the paid leave rate equals at least 50% of the employee’s qualifying wages. The Credit for employers may total between 12.5% and 25% of the qualifying wages. These rules are explained in prior IRS guidance found in the FAQs section of the IRS website.
Some important elements of the Act are outlined below:

• Who is an eligible employer? – An employer who is eligible for the Credit is one who has a written policy in place that requires the employer to provide at least 2 weeks of paid family and medical leave annually to qualifying employees other than part-time employees. The 2 week requirement is pro-rated for part-time employees (those employees working less than 30 hours per week) by the ratio of the weekly hours they are expected to work to those of an “equivalent” full-time employee.
• Who is a qualifying employee? – A qualifying employee is any employee under the Fair Labor Standards Act who has been employed by the employer for one year or more and who, for the preceding year, had compensation of not more than a certain amount. For an employer claiming a credit for wages paid to an employee in 2018, the employee must not have earned more than $72,000 in 2017.
• What constitutes family and medical leave? – For the purposes of the TCJA, family and medical leave has the same definition as the FMLA Sections 102(a)(1)(A)-€ and (3)(Sec. 45S€(1)). Leave can be claimed for any of the following reasons (also see IRS Tax Reform Tax Tip 2018-69, May 4, 2018, available at www.irs.gov, and Notice 2018-71, Q&A 8):
  • The birth and care of a newborn child of the employee;
  • The placement of a child with the employee for adoption or foster care;
  • To care for the employee’s spouse, child, or parent who has a serious health condition;
  • The employee’s inability to perform the functions of his or her position due to a serious health condition;
  • A qualifying “exigency” arising from the fact that the employee’s spouse, child, or parent is on “covered active duty” or “has been notified of an impending call or order to covered active duty” in the armed forces; or
  • For a qualifying employee who is the spouse, child, parent, or next of kin of a covered servicemember, to care for the servicemember.If an employer provides paid vacation leave, personal leave, or medical or sick leave (other than leave specifically for one or more of the purposes stated above), that paid leave is not considered family and medical leave. In addition, any leave paid by a state or local government or required by state or local law will not be considered in determining the amount of employer-provided paid family and medical eave.
• What are the minimum paid leave policy requirements? – In their written policy, an eligible employer must allow at least two weeks of paid family and medical leave (pro-rated for part-time employees) for all qualifying employees at a rate of at least 50% of the wages normally paid to them. And, for any qualifying employees not covered by Title I of the FMLA, the employer needs to make sure the employer will not interfere with, restrain, or deny any right under the policy. They also need to make sure they will not discharge or discriminate against any individual for opposing any practice prohibited by the policy. Q&A 3 of Notice 2018-71 has sample language to satisfy this “noninterference” requirement. Employers must make the leave available to all qualifying employees, which means all employees who’ve been employed for at least one year and had compensation from the employer for the preceding year that didn’t exceed a certain dollar amount (for 2017 or 2018, this amount is $72,000). The law allows an employer to prorate the two-week leave period for part-time employees (those customarily employed for fewer than 30 hours per week).
• How to calculate and claim the credit? – The credit is a percentage of the amount of wages paid to a qualifying employee while on family and medical leave for up to 12 weeks per taxable year. The minimum percentage is 12.5% and is increased by 0.25% for each percentage point by which the amount paid to a qualifying employee exceeds 50% of the employee’s wages, with a minimum of 25%. In certain cases, an additional limit may apply.
• What is the effective date? – The credit is generally effective for wages paid in taxable years of the employer beginning after December 31, 2017, and it is not available for wages paid in taxable years beginning after December 31, 2019.
• What must an employer’s written leave policy include? – An eligible employer must include in their policy an allowance of at least two weeks of paid family and medical leave (pro-rated for part-time employees) for all qualifying employees at a rate of at least 50% of the wages normally paid to them. And, for any qualifying employees not covered by Title I of the FMLA, the employer needs to make sure the employer will not interfere with, restrain, or deny any right under the policy. They also need to make sure they will not discharge or discriminate against any individual for opposing any practice prohibited by the policy. Q&A 3 of Notice 2018-71 has sample language to satisfy this “noninterference” requirement. Employers must make the leave available to all qualifying employees, which means all employees who’ve been employed for at least one year and had compensation from the employer for the preceding year that didn’t exceed a certain amount (For 2017 or 2018, this amount is $72,000). The law allows an employer to pro-rate the two-week leave period for part-time employees (those customarily employed for fewer than 30 hours per week).
• When must an employer’s policy be in place? – Except for the first taxable year of an employer beginning after December 31, 2017, an employer can claim the credit only for leave taken after the written leave policy is in place.

Weighing the Potential Benefits for Employers:
The family and medical leave credit is potentially beneficial to employers that already provide paid family and medical leave, with some additional administrative requirements. The requirements and significant costs associated with maintaining benefits and positions for employees out on leave may outweigh any potential tax benefit offered by the new credit for those employers not currently offering paid family and medical leave.
The adoption of a new policy may serve as an employee morale booster. Companies without family and medical leave policy may now want to consider implementing one as employees not currently covered by the FMLA will appreciate the opportunity to have job-protected leave time like other workers. Those workers with those for whom unpaid family and medical leave is already available may also appreciate receiving at least half of their normal salary while they care for a newborn child or take time off from work for other qualified reasons.
For more information see: www.irs.gov
Source: New Tax Credit for Paid Family and Medical Leave | Journal of Accountancy – by: Matthew Geiszler, PH.D., and John McKinley, CPA, CGMA, J.D., LL.M.