Question: Our company is considering adopting a paid family leave program for employees. I think I read something indicating paid family leave was addressed in the tax bill that passed late last year. Is that true?
Answer: First of all, kudos to you. Paid family and medical leave policies are a great benefit for employers to adopt to stay competitive in the current market and have become a necessity in the several states that have adopted paid family leave laws or regulations.
To answer your question, you are correct. The federal Tax Cuts and Jobs Act enacted in late 2017 creates § 45S of the IRS Code to provide certain employers a tax credit for offering paid family and medical leave to employees. To be eligible for the credit, the employer’s paid family and medical leave policy must:
- Be voluntarily implemented by the employer (i.e., the employer cannot be in a state or locality that requires employers to provide paid family and medical leave). Additionally, leave paid by a state or local government does not count.
- Be adopted in writing.
- Provide pay for at least two weeks of a full-time employee’s family and medical leave. Part-time employees must also be offered a commensurate amount of paid leave on a pro rata basis, taking into account the number of hours a part-time employee is expected to work each week compared to an equivalent full-time employee. The credit maxes out at 12 weeks of paid family and medical leave.
- Provide that employees will be paid at least 50 percent of their normal pay while on leave.
The amount of the credit an eligible employer receives depends on the level of pay provided to employees. Employers who choose to pay employees at the 50 percent threshold will receive a 12.5 percent tax credit; the credit increases by 0.25 percent (capping at 25 percent overall) for each percentage point above 50 percent of normal pay the employer pays employees on leave. For example, if an eligible employer chooses to pay employees on paid family and medical leave 60 percent of their normal pay, then an eligible employer’s tax credit would be 15 percent.
The tax law defines qualifying employees as those who meet the definition of employee under the Fair Labor Standards Act of 1938 (29 USC § 203(e)), who have worked for the employer for at least one year and, for the preceding year, had compensation of 60 percent or less of the compensation threshold for highly compensated employees. Paid family and medical leave is leave that is protected under the Family and Medical Leave Act (FMLA). If the employee’s leave is paid vacation leave, personal leave, or other medical or sick leave, then that is not eligible family and medical leave for purposes of the tax credit.
Employers that are not subject to the FMLA may also receive tax credits for paid family and medical leave if they otherwise provide employees the same protections under the FMLA and meet the other requirements discussed above, such as having a written policy. The policy must ensure that the employer will not interfere with, restrain, or deny an employee the ability to take leave pursuant to the policy or retaliate against any employee for exercising their rights under the policy.
This tax credit is not currently a long-term benefit for employers. Instead, it is in effect for two years and sunsets on December 31, 2019 unless re-enacted by Congress.
If you choose to voluntarily implement a paid family and medical leave policy, we recommend you consult with counsel to ensure your written policy meets all technical requirements of the new tax law.