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The IRS recently issued Notice 2018-71, which provides awaited additional guidance on the employer credit for paid family and medical leave under section 45S of the Internal Revenue Code.  Click here to review our previous article that gives a more general overview of the law.

Summary:

The new guidance provides 34 questions and answers and covers topics such as employer eligibility, minimum requirements, written policy requirements, minimum leave requirements, qualifying employees, and calculating and claiming the credit.

Brief Overview:

The questions and answers listed in Notice 2018-71 are incredibly detailed and it is recommended that employers review the notice.  That being said, the following information are some of the main points covered in the guidance.

  1. How to Claim the Credit.  An eligible employer must file IRS Form 8994, Employer Credit for Paid Family and Medical Leave, and IRS Form 3800, General Business Credit, with its tax return to claim the credit.
  2. Written Policy Required.  Employers must adopt a written policy that  does the following: covers all qualifying employees; provides at least two weeks of annual paid family and medical leave (with a proportionate amount of leave for part-time qualifying employees); the policy must provide for at least 50% of wages; and the policy must include “non-interference” protections if an qualifying employee is not covered under title I of the FMLA.
  3. Qualifying Employee.  A qualifying employee is an employee who has been employed by the employer for one year or more, and whose compensation for the preceding year does not exceed an amount equal to 60% of the amount applicable for that year. For 2017, the applicable amount is $120,000. Accordingly, to be a qualifying employee in 2018, an employee must have earned no more than $72,000 (60 percent of $120,000) in compensation in 2017 (or if applicable, in the employer’s fiscal year beginning in 2017).
  4. State-Required Leave Not Eligible. Any leave paid by a State or local government or required by State or local law is not taken into account in determining the amount of paid family and medical leave provided by the employer.  The following examples explain how an employer that is required to provide leave by the state might still qualify for the credit.
    • Example 1. Facts: Under State law, an employee on family and medical leave is eligible to receive six weeks of benefits paid by a State insurance fund at a rate of 50 percent of the employee’s normal wages. Additionally, Employer’s written policy concurrently provides each qualifying employee with six weeks of annual paid family and medical leave at a rate of payment of 30 percent of the wages normally paid to the employee for services performed for Employer. Consequently, in the aggregate, a qualifying employee can receive six weeks of annual paid family and medical leave at a rate of payment of 80 percent of the wages normally paid to the employee. Conclusion: Employer’s policy does not independently satisfy the requirement that the rate of payment be at least 50 percent of the wages normally paid to an employee.
    • Example 2. Facts: Same facts as Example 1, except that Employer’s written policy provides each qualifying employee with six weeks of annual paid family and medical leave at a rate of payment of 50 percent of the wages normally paid to the employee that runs concurrently with the State leave. Consequently, in the aggregate, a qualifying employee can receive six weeks of annual paid family and medical leave at a rate of payment of 100 percent of the wages normally paid to the employee. Conclusion: Employer’s policy independently satisfies the requirement that the rate of payment be at least 50 percent of the wages normally paid to an employee. Only wages paid under Employer’s written policy (50 percent of wages normally paid to the employee) may be used in calculating the credit. Wages paid pursuant to State law are not used in calculating the credit.
    • Example 3. Facts: Under State law, employers are required to provide employees six weeks of family and medical leave, and the State law permits this leave to be either paid or unpaid. Employer’s written policy provides each qualifying employee with six weeks of annual paid family and medical leave at a rate of payment of 50 percent of the wages normally paid to the employee. Conclusion: Employer’s policy independently satisfies the requirement that the rate of payment be at least 50 percent of the wages normally paid to an employee.
  5. Timing Requirement. For the first taxable year beginning after December 31, 2017, the employer’s written policy must be in place before the paid family and medical leave for which the employer claims the credit is taken. The written policy is considered to be in place on the later of the policy’s adoption date or the policy’s effective date.
  6. Transition Rule. For an employer’s first taxable year beginning after December 31, 2017, a written leave policy or an amendment to a policy (whether it is a new policy for the taxable year or an existing policy) will be considered to be in place as of the effective date of the policy (or amendment), rather than a later adoption date, if (a) the policy (or amendment) is adopted on or before December 31, 2018, and (b) the employer brings its leave practices into compliance with the terms of the retroactive policy (or retroactive amendment) for the entire period covered by the policy (or amendment), including making any retroactive leave payments no later than the last day of the taxable year.

    • Example 1. Facts: Employer’s taxable year is the calendar year. Employee takes two weeks of unpaid family and medical leave beginning January 15, 2018. Employer adopts a written policy that satisfies the requirements on October 1, 2018, and chooses to make the policy effective retroactive to January 1, 2018. At the time the policy is adopted, Employer pays Employee (at a rate of payment provided by the policy) for the two weeks of unpaid leave taken in January 2018. Conclusion: Assuming all other requirements for the credit are met, Employer may claim the credit with respect to the family and medical leave paid to Employee for the leave taken in January 2018.
    • Example 2. Facts: Employer’s taxable year is the calendar year. Employer amends its FMLA policy in writing on April 15, 2018, effective for leave taken on or after April 15, 2018, to provide that four weeks of FMLA leave will be paid leave. Employer’s FMLA policy does not provide for leave for qualifying employees who are not covered by title I of the FMLA or include “non-interference” language. Employee, who is a qualifying employee, but who is not covered by title I of the FMLA, takes three weeks of unpaid family and medical leave beginning June 18, 2018. On October 1, 2018, Employer amends its written policy to include “non-interference” language and to provide paid leave effective April 15, 2018, for qualifying employees who are not covered by title I of the FMLA. On October 15, 2018, Employer pays Employee for the three weeks of family and medical leave Employee took beginning June 18, 2018. Conclusion: Assuming all other requirements for the credit are met, Employer may claim the credit with respect to the family and medical leave paid to Employee for the leave taken beginning in June 2018.

 

Employer Action Items:

  • Review current policies and make any amendments, as needed, to come into compliance.
  • Adopt your policy on or before December 31, 2018 and ensure that the policy is written.
  • If the policy is retroactive, be sure to bring the qualifying leave into compliance for the entire period covered under the policy (including making any retroactive payments by the last day of the taxable year).
  • Calculate and claim the credit on the proper tax forms.

 

Helpful Links:

IRS Notice 2018-71

Sequoia Blog – New Paid Family Leave Tax Credit

 

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.

Joanna Castillo– Joanna is the Client Compliance Manager for Sequoia, where she works with our clients to optimize and streamline benefits compliance. In her free time, Joanna enjoys live music, college football, travel, and walking her dog in Golden Gate Park.