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paid FAMILY AND MEDICAL leave Part of the Tax Cuts and Jobs Act of 2017 established a tax credit for employers that provide paid family or medical leave to its employees. The credit is not limited to leaves of absence under the Family and Medical Leave Act, but also applies to employers who are not subject to the FMLA. Payments made to employees on qualifying shortterm disability, whether through an employer program or through an insured short-term disability policy, may also qualify for the tax credit. What is the credit? Employers can receive a tax credit equal to 12.5 to 25 percent of the paid family leave provided as a benefit to employees. If the employer pays its employees one half of the wages which would have normally been paid to the employee (the minimum required to qualify), the tax credit will be one quarter of that amount, or 12.5 percent. The tax credit increases as the benefit to the employee increases, with the maximum credit being 25 percent, based on the employer paying the employees 100 percent of their usual wages. What types of leave qualify? Employers who provide paid leave to employees for the following purposes (taken from the FMLA) may qualify for the tax credit:
• Because of the birth of a son or daughter of the employee and in order to care for such son or daughter. • Because of the placement of a son or daughter with the employee for adoption or foster care. • In order to care for the spouse, or a son, daughter, or parent, of the employee, if such spouse, son, daughter, or parent has a serious health condition.
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• Because of a serious health condition that makes the employee unable to perform the functions of the position of such employee. • Because of any qualifying exigency (as the Secretary [of Labor] shall, by regulation, determine) arising out of the fact that the spouse, or a son, daughter, or parent of the employee is on covered active duty (or has been notified of an impending call or order to covered active duty) in the Armed Forces.
What are the policy requirements? To be eligible for the credit, an employer must have a written policy that provides at least two weeks of paid annual leave for full-time employees, and a pro-rata amount of leave for part-time employees. The policy must pay an employee at least half of the wages which would normally be paid, and must cover all qualifying employees; in order to qualify, employees must be employed for more than one year, and cannot be paid more than a certain amount, based on an annual determination published by the IRS. For example, to be a qualifying employee in 2018, the employee could not have earned more than $72,000. The tax credit is available to employers providing paid family and medical leave to qualifying employees even if the employees are not covered by the Family and Medical Leave Act. Payments made to employees who work for employers with less than fifty employees, or who are part-time, can still qualify for the tax credit. If qualifying employees are not covered under the FMLA, the employer's policy must include protections against interference with employees’ use of leave under the policy: • [Employer] will not interfere with, restrain, or deny the exercise of, or the attempt to exercise, any right provided under this policy. [Employer] will not discharge, or in any other manner discriminate against, any individual for opposing any practice prohibited by this policy.
IRS Guidance (Notice 2018-71). In addition, the policy may not allow leaves of absence other than those listed above; for example, if a policy allows leaves for a non-serious health condition, or for personal reasons, the policy will not be in compliance with the applicable requirement, and the tax credit will not be available. What are the deadlines? Time is of the essence. Starting January 1, 2019, in order to qualify for the tax credit, an employer must adopt a qualifying policy and have it in place at the time the leave is taken. Paid family and medical leave is a benefit that is highly valued by employees, but can be costly. Employers that already provide paid leave, or may provide paid leave in the future, may want to consider taking the opportunity to review current policies to determine if they can qualify for the tax credit. 28
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