Guidance on the Employer Credit for Paid Family and Medical Leave

By Thomas J. Tyler, CPA
| 3/12/2019
The Tax Cuts and Jobs Act included a new tax credit for employers that pay wages to qualifying employees while they are on family or medical leave. IRC Section 45S provides a tax credit to employers that voluntarily pay qualifying employees for family and medical leave if the leave is taken for the same purposes as allowed under Title I of the Family and Medical Leave Act of 1993 (FMLA). However, if a state mandates payment for such leave, the payment is not voluntary and, as a result, no credit is allowed to the employer. The credit is available for the 2017, 2018, and 2019 tax years.

To be eligible for the credit, an employer must have a written plan that covers all qualifying employees. Qualifying employees are employees who have been employed for more than one year and whose compensation for the preceding year does not exceed an amount equal to 60 percent of the compensation threshold for a "highly compensated employee." In addition, the plan must provide at least two weeks of annual paid family and medical leave for each full-time qualifying employee, a proportionate amount of leave for each part-time qualifying employee, and at least 50 percent of the qualifying employee’s wages while the employee is on leave. The IRS released Notice 2018-71 to provide guidance on the credit for paid family and medical leave and intends to publish proposed regulations under Section 45S. The notice includes sections that address the following topics:
  • Eligible employer
  • Family and medical leave
  • Minimum paid leave requirements
  • Calculating and claiming the credit
  • Effective date
Eligible employer
An eligible employer is an employer that has a written plan that satisfies certain requirements.The notice provides that an employer’s plan under Section 45S can be single or multiple documents and may be included in the same document that governs the employer’s other leave policies. However, only the leave specifically designated for FMLA purposes is considered to be family and medical leave under Section 45S. 

A written plan must be in place by the time the leave is taken. A plan is considered to be in place on the later of the plan’s adoption date or effective date. However, a transition rule that only applies to the employer’s first taxable year beginning after Dec. 31, 2017, allowed employers to establish new or amend existing plans by Dec. 31, 2018, to claim the credit for leave paid retroactive to the beginning of the employer’s 2018 tax year. 

Family and medical leave
The notice makes clear that only leave designated for one or more FMLA purposes may be considered under Section 45S. In addition, any leave paid by a state or local government is not taken into account when determining the amount of paid family and medical leave provided by the employer. However, leave provided under an employer’s short-term disability program, whether self-insured by an employer or provided through a short-term disability policy, can be characterized as family and medical leave if it otherwise meets the requirements under Section 45S. Additionally, any pay for leave that is required by state or local law also is ineligible for the credit. 

Minimum paid leave requirements
For 2018, employees are considered qualifying employees if their compensation was no more than $72,000 in 2017. Until further guidance is released, an employer may use any reasonable method to determine whether an employee has been employed for more than one year, though the requirement that an employee work 12 consecutive months to be considered a qualifying employee would not be viewed as a reasonable method for determining whether an employee has been employed for one year. Additionally, any requirement that an employee work a minimum number of hours to be a qualifying employee also would not be considered a reasonable method for determining if an employee has been employed for one year.

An employer’s written plan cannot exclude any classification of employees if they are qualifying employees, and must provide qualifying employees who are full-time with at least two weeks of annual family and medical leave and a proportionate amount of annual paid family and medical leave to qualifying employees who are part-time. A part-time employee is an employee who is customarily employed for fewer than 30 hours per week. Pending further guidance, an employer may use any reasonable method to determine how many hours an employee customarily works per week for the employer.

Overtime, other than regularly scheduled overtime, and discretionary bonuses are excluded when determining 50 percent of the wages of a qualifying employee. For employees who are paid on a basis other than a salaried or hourly rate, the rules for determining regular rates in the Fair Labor Standards Act can be used. 

Calculating and claiming the credit
The credit equals 12.5 percent of the amount of wages paid to qualifying employees during the period in which the employee is on family and medical leave. The credit percentage is increased by 0.25 percent for each percentage point the rate of payment exceeds 50 percent, with a maximum credit of 25 percent. The deduction for wages or salaries must be reduced by an amount equal to the amount of the credit. 

The notice clarifies that each member of a controlled group of corporations and each member of a group of businesses under common control makes a separate election to claim or not claim the credit. Therefore, the decision of one entity to not provide paid family and medical leave to its qualifying employees does not have a negative impact on other entities within the same group if they choose to provide paid family and medical leave and claim the credit.

The credit is claimed on Form 8994, “Employer Credit for Paid Family and Medical Leave.” 
 

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