Guidelines for New Family & Medical Leave Employer Tax Credit
An amendment to the Family and Medical Leave Act (FMLA) of 1993 was included in the December 2017 tax reform bill to allow eligible employers to receive a tax credit for providing paid time off to qualifying employees under certain circumstances. The FMLA already requires employers with more than 50 employees to provide time off the same purposes, but that time off is not required (by federal law) to be paid. This credit is targeted to employers who go above and beyond labor laws to provide paid time off in accordance to a written plan that meets certain requirements. Small employers under the 50-employee FMLA threshold can also qualify. The credit is calculated as a percentage of the wages paid during the leave period.
Legislation and guidelines are developing
The devil is in the details of how an employer becomes eligible and what qualifies an employee. The Department of the Treasury and the Internal Revenue Service are charged with coming up with the specifics. On September 24th, the IRS posted its first round of guidance on this credit and intends to issue more official regulations before the end of the year. Until that time, employers can only rely on the details currently available. An employer with a compliant written plan in-place by December 31, 2018, can claim the credit retroactively to January 1, 2018 for qualifying leave payments made earlier in the year. An employer may also pay employees retroactively for unpaid leave already taken to bring them into compliance for the entire year.
Breaking down the details
The plan makes more sense if we start with the employee. Qualifying employees are any employee (full time or part time) who has been employed for one year or more and was not paid during the preceding year more than 60% of the same compensation threshold used to designate highly compensated employees for retirement plan purposes. In 2017, this amount was $72,000. The employer would not be penalized for offering the same benefit to employees who made over that amount, but only amounts paid to qualifying employees are included in the tax credit calculation. To be eligible, an employer must have a written plan that complies with four basic rules:
1. The plan must cover all qualifying employees, which are all employees described in the preceding paragraph.
2. The plan must provide a minimum of two weeks of paid family and medical leave annually for each full-time qualifying employee and a proportionate amount for part-time employees.
3. The plan’s paid leave must be at least 50% of the rate the employee is paid while the employee is not on leave. Overtime wages and discretionary bonuses are excluded.
4. If some or all qualifying employees are not covered by FMLA, then the plan must include specific anti-discrimination language.
The leave provided must only be available for the same limited purposes that require leave under FMLA regulations. Therefore, most employers who have a PTO plan would need to offer these two weeks in addition to normal PTO. Also, if your business operates in a location with required paid time off under the same conditions, such as required paid maternity leave, those payments will not qualify and only payment for leave beyond the amount required by state or local law will qualify.
The IRS guidance includes many details related to the above rules and how they may apply in specific situations. Employers should ensure that their written plan complies in situations likely to occur in their own work environments. For example, wages only qualify if they are subject to federal unemployment taxes, so 501(c)(3) organizations who are exempt from that payroll tax will not qualify for the credit.
What is the actual credit?
The credit begins at 12.5% of the leave wages paid for employers who pay the minimum 50% of normal wages. Employers get an additional 0.25% credit for every 1% they pay above that 50% minimum. The credit will max out at 25% for employers who pay 100% an employee’s normal rate. If the paid leave exceeds 12 weeks, only the first 12 weeks can be included in the credit calculation. Employers will claim this credit with a yet-to-be-finalized form attached to their federal income tax returns.
Taxpayer circumstances can vary greatly and not all relevant details can be included in a single article. While we do hope it has been informative, this article is not intended to be tax planning advice. If your firm would like assistance to ensure they can take advantage of this credit or with assistance in calculating the potential benefit, please contact our office (225) 927-6811.