Additional IRS Guidance for Employers: Tax Credit for Paid Employee Leave Under the Family Medical Leave Act
The Family Medical Leave Act of 1993 (FMLA) is a federal labor law that requires employers with 50 or more employees to provide up to 12 weeks of job-protected unpaid leave to certain eligible employees. The FMLA leave requirements apply to certain specified family and medical circumstances, including the birth or adoption of a child, caring for the employee’s spouse, child or parent who has a serious health condition, or because of the employee’s own serious health condition.
As part of the Tax Cuts and Jobs Act of 2017, Congress added new Section 45S to the Internal Revenue Code. This new provision provides for an employer business tax credit (Credit), available for the 2018 and 2019 tax years only, for employers that pay at least a minimum level of wages to qualifying employees while the employees are on FMLA leave.
The amount of the Credit ranges from 12.5% to 25% of the wages paid by the employer to its qualifying employees while they are on FMLA leave.
To provide additional guidance regarding the Credit, the IRS recently issued Notice 2018-71 (Notice). The most pertinent aspects of the Notice are summarized below.
Written Policy Required
- The Notice clarifies that to be eligible to receive the Credit, an employer must have a written policy in place before the paid leave period begins that expressly incorporates the rules that must be met by the employer for the employer to be eligible for the Credit, including the following considerations:
- The policy must cover all employees employed by the employer for at least one year and who also had compensation from the employer for the immediately preceding year that did not exceed a specified amount (for 2018, the employee must not have been paid more than $72,000 in 2017); however, the policy cannot require 12 consecutive months to satisfy the one-year requirement. For this purpose, the “preceding year” is generally the preceding calendar year; however, for an employer whose fiscal year is not the calendar year, the employer may choose either its immediately preceding fiscal year or the calendar year ending in its immediately preceding fiscal year.
- The Credit is only available for a paid FMLA leave of at least two weeks for full-time employees (prorated for part-time employees who work less than 30 hours per week).
- The wages paid for the FMLA leave period must be equal to at least 50% of the employee’s existing rate of pay, excluding overtime pay and discretionary bonuses.
- If the employer has any employees who are not covered by Title I of the FMLA (e.g., who work for less than 1,250 hours per year), the policy must specify certain employer “non-interference” requirements, to the effect that the employer may not interfere with, restrain, or deny the exercise of, or the attempt to exercise, any right provided under the policy, nor discharge, or in any other manner, discriminate against any individual for opposing any practice prohibited by the policy.
Family and Medical Leave
- The Credit is available for circumstances arising from of any one or more of the following events:
- The birth and newborn care of a child of the employee;
- The placement of a child with the employee for adoption or foster care;
- Caring for the spouse, a child or a parent of the employee with a serious health condition;
- A serious health condition of the employee that renders the employee unable to perform the functions of the employee’s position.
- Any qualifying exigency, as determined by regulations of the U.S. Secretary of Labor, arising from the employee’s spouse, child or parent being a member of the Armed Forces, including the National Guard and reserves, and who is on current active duty or has been notified of an impending call or order to covered active duty.
- Caring for a covered service member with a serious injury or illness if the employee is the spouse, child, parent or next of kin of the service member.
Wages Paid under Employer’s Short-Term Disability Program or by Professional Employer Organizations (PEOs)
- The Credit is available for paid FMLA leave provided under an employer’s short-term disability program, regardless of whether the program is self-funded or insured.
- The Credit is available to an employer whose employees are paid their wages by a PEO.
Amount of the Credit
- The Credit amount is 12.5% of the amount of wages paid during the FMLA leave, if the wages equal at least 50% of the employee’s normal rate of pay (excluding overtime pay and discretionary bonuses). The percentage increases by 0.25 percentage points for each percentage point by which the wages paid during the leave exceeds 50%, with a maximum percentage of 25%.
Effect of the Credit on Employer’s Compensation Deduction
- IRC Section 280C reduces an employer’s compensation deduction for federal income tax purposes by an amount equal to the Credit taken by the employer.
Claiming the Credit
- The Credit is claimed by the employer by filing IRS Form 8994, “Employer Credit for Paid Family and Medical Leave” and IRS Form 3800, “General Business Credit” with its federal income tax return.
Employers who wish to avail themselves of the Credit opportunity must have the required written policy in place before the FMLA leave begins. Consequently, where the Credit is to be sought, it is imperative that the employer work with its advisors to implement the required written policy at the earliest possible time. If the Credit is not extended to years beyond 2019, employers who had not previously paid wages to their employees on an FMLA leave, but who decide to do for purposes of obtaining the Credit for 2018 and/or 2019, will be faced with a potentially difficult decision of whether to discontinue paying wages to employees on an FMLA leave after 2019. Employers should be sure to take this into consideration for purposes of all applicable employee communications. It remains to be seen whether the Credit will be extended to years beyond 2019.
For more information, please contact Dana Fried, Managing Director National Tax Services, at Dana.Fried@CohnReznick.com or 516-417-5064.
Any advice contained in this communication, including attachments and enclosures, is not intended as a thorough, in-depth analysis of specific issues. Nor is it sufficient to avoid tax-related penalties. This has been prepared for information purposes and general guidance only and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is made as to the accuracy or completeness of the information contained in this publication, and CohnReznick LLP, its members, employees and agents accept no liability, and disclaim all responsibility, for the consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.