FAQs on New Tax Credit for Paid Family Medical Leave

May 3, 2018

As part of tax reform passed in December 2017, Congress created a tax credit for employers who provide paid family and medical leave in 2018 and 2019. The newly added tax code section (26 USC 45S) raised many questions for employers. In April, the IRS published FAQs, but acknowledged that more information is still needed. Here are the highlights:

  •  Eligible paid family and medical leave includes leave for any of the reasons covered by the Family and Medical Leave Act (FMLA).
  •  The credit is available even if the employer is not subject to the FMLA, if there is a written policy in place that meets the criteria below.
  •  The employer’s policy must:
    •  be in writing,
    •  allow full-time employees (30+ hours/week) at least 2 weeks of annual paid family and medical leave,
    •  allow part-time employees a prorated amount of paid family and medical leave, and
    •  pay at least 50% of the employee’s normal wages during eligible leave.
  •  To qualify for credit, the employee receiving paid leave must:
    •  have been employed for at least one year, and
    •  not have compensation in the preceding year that is more than 60% of the annual threshold for a highly compensated employee. (To qualify in 2018, the employee could not have compensation of more than $72,000 in 2017.)
  •  The credit is 12.5% of the wages paid when the employee receives 50% of pay while on leave. The credit increases by .25 percentage points for each additional percent of pay above 50%, to a maximum credit of 25% of wages paid.
  •  Tax credit is for up to 12 weeks of paid leave per tax year, per employee.
  •  Credit is not available for:
    •  paid vacation or personal leave,
    •  regular use of sick leave (other than specifically for FMLA eligible purposes), or
    •  leave paid by or required by any State or local government.
  •  An employer who takes the tax credit cannot also take a business tax deduction for the amount of the credit, or use those wages to determine other general business credits.

The IRS plans to issue more guidance on:

  •  When an employer’s written policy must be in place.
  •  How paid “family and medical leave” relates to an employer’s other paid leave.
  •  How to determine whether an employee has been employed for one year or more.
  •  The impact of state and local leave requirements.
  •  How determining the credit is affected by controlled group membership or being under the common control of another business.

We will provide more information as new guidance becomes available.