Beginning in 2018 and continuing through 2019, the Tax Cut and Jobs Act (“TCJA”) allows eligible employers to take a business tax credit when they provide paid qualifying family and medical leave, even if they are not covered by the Family and Medical Leave Act (“FMLA”) but offer FMLA-like protections.
The Tax Credit
The TCJA allows for a tax credit to eligible employers who voluntarily offer at least two weeks’ annual paid family and medical leave in an amount equal to at least 50% of qualifying employees’ normal wages during any period in which such employees are on family and medical leave. If so, the employer is eligible for a tax credit equal to 12.5% of that amount. The tax credit increases .25% for each percentage point paid over 50% of the employees’ normal wages, up to a maximum tax credit of 25%. The maximum amount of family and medical leave that may be taken into account for the credit in any taxable year is twelve weeks.
Family and Medical Leave
The TCJA incorporates the definitions used in the FMLA (Section 102(a)(1)(A) through (E), and Section 102(a)(3)) to define the types of leave that qualify for the tax credit. However, the tax credit does not apply to paid vacation, personal, medical, or sick leave provided by the employer (other than FMLA leave). It is also unlikely that it applies to PTO. Additionally, the credit does not apply to any leave paid by state or local governments or paid leave that is mandated by state or local law.
Eligible employers are those who: 1) have a written policy in place that voluntarily provides at least two weeks of paid family and medical leave at not less than 50% of the qualifying employee’s normal wages; and 2) provide paid leave to part-time qualifying employees at an amount that is pro-rated based on what is paid to qualifying full-time employees.
The TCJA treats employers who are not covered by FMLA as “eligible employers” if they meet the requirements described above, and their written policy provides FMLA-like protections to their employees – i.e., the policy ensures the employer will not interfere with or deny the exercise of rights under the policy or discriminate against individuals opposing any practice prohibited by the policy.
A qualifying employee is one who: 1) meets the definition of “employee” under the Fair Labor Standards Act; 2) has been employed by the employer for at least one year; and 3) did not have compensation in excess of 60% of the Highly Compensated Employee (HCE) limit for the previous year. The HCE limit for 2017 and 2018 is $120,000. Therefore, a qualifying employee could not have made more than $72,000.00 in the previous year.
Employers who do not meet the eligibility criteria as described above should weigh the cost of developing a paid leave policy against the potential tax credit that could be enjoyed if they have such a policy. You should consult your tax advisor for assistance. When conducting a cost-benefit analysis, keep in mind that the TCJA is a sunset law, set to expire at the end of 2019 unless Congress steps in.
Additionally, the Internal Revenue Service (“IRS”) has yet to publish regulations providing further guidance on the TCJA that could affect an employer’s policy. At this time there are still open questions that are yet to be addressed, such as:
- Whether the tax credit can be applied to family and medical leave payments required by state or local laws that only require employers to provide unpaid leave;
- How employers should determine the hourly wage rate for non-hourly wage earners in order to calculate the maximum potential credit when the Act indicates that wages of non-hourly wage earners are to be pro-rated under the IRS’s regulations (that are yet to be published); and
- Whether an employer may use a fiscal or calendar year for the purposes of the TCJA’s 12-week leave limit.
Future articles will address IRS guidance as it pertains to these and other potential issues as it becomes available.