Background:
The Tax Cuts and Jobs Act adds a new tax credit for employers that provide paid family and medical leave benefits to employees. The credit is effective for wages paid in taxable years starting on January 1, 2018 and it is set to expire for wages paid in taxable years beginning after December 31, 2019.
While the current federal Family and Medical Leave Act (FMLA) provides certain job-protected leave, there is no requirement that the leave offer any wage replacement. As such, the new law acts as an incentive to employers to offer paid leave for purposes of FMLA.
The tax credit requirements, as currently outlined in the Tax Cuts and Jobs Act, remains somewhat unclear. Based on the current guidance available, here is some additional information about what the tax credit is and how an employer might qualify:
Paid Leave Policy Requirements:
- Employers must have a written policy in place to provide paid family and medical leave to qualifying full time employees;
- The policy must also include an amount of paid family and medical leave for part time employees that is prorated based on expected work hours;
- The paid leave must be for a minimum of 2 weeks annually (with the credit only applying to a maximum of 12 weeks of leave);
- The payment must be at least 50% of the wages normally paid to the employee;
- The employer’s written policy must provide anti-retaliation and anti-discrimination protections.
Qualifying Employees:
In order to receive the paid family leave benefit, the employee must:
- be employed by the employer for 1 year or more; and
- have compensation no greater than 60% of the §414(q)(1)(B) highly compensated employee limit in the prior year (currently $120,000)—which means the 2018 limit on 2017 compensation is $72,000.
Permitted Reasons for Leave:
Permitted reasons for leave under the new law align with the current FMLA regulations, which allow leave for the following:
- For birth of a child and to care for the new child;
- For placement of a child with the employee for adoption or foster care;
- To care for a spouse, child, or parent of the employee with a serious health condition;
- For the employee’s own serious health condition that makes them unable to work; or
- For other qualifying exigencies outlined in the FMLA (such as military-related leave).
Additional Information:
- Vacation pay, sick pay, and personal leave pay do not qualify for the credit unless that leave is specifically taken as a family and medical leave. As such, a company’s current PTO policy will likely not qualify for this benefit.
- Any leave which is paid by a state or local government, or required by state or local law will NOT be taken into account in determining the amount of paid family leave provided by the employer (this would include, for example, California SDI/PFL, San Francisco Paid Parental Leave, and New York PFL). On the other hand, if an employer in those states provides paid leave beyond the state mandated benefit, they may be able to claim the credit on the excess benefit amount.
- The tax credit amount begins at 12.5% of leave payment for pay at 50% of an employee’s normal pay. The credit increases in increments of .25% to a maximum of 25%, depending on the level of wage replacement being provided.
Employer Action Items:
- Employers who wish to take advantage of the tax credit should update their leave policies (if needed) and should communicate any newly offered benefits to employees.
- Consult with counsel or your tax advisor to determine whether your policy complies.
Additional Resources:
IRS Notice 2018-71 (additional guidance released September 24, 2018)
The information and materials on this blog are provided for informational purposes only and are not intended to constitute legal or tax advice. Information provided in this blog may not reflect the most current legal developments and may vary by jurisdiction. The content on this blog is for general informational purposes only and does not apply to any particular facts or circumstances. The use of this blog does not in any way establish an attorney-client relationship, nor should any such relationship be implied, and the contents do not constitute legal or tax advice. If you require legal or tax advice, please consult with a licensed attorney or tax professional in your jurisdiction. The contributing authors expressly disclaim all liability to any persons or entities with respect to any action or inaction based on the contents of this blog.
