Family and Medical Leave Tax Credit

By Matt Dunning

 

Paid Family and Medical Leave

Part of the Tax Cuts and Jobs Act of 2017 established a tax credit for employers that provide paid family or medical leave to its employees. The credit is not limited to leaves of absence under the Family and Medical Leave Act but can also include payments made to employees on qualifying short-term disability.

What is the credit?  Employers can receive a tax credit equal to 12.5 to 25 percent of the amounts paid to employees.

What types of leave qualify?  Employers who provide paid leave to employees for the following purposes (taken from the FMLA) may qualify for the tax credit:

The birth, adoption, or placement for foster care of a son or daughter of the employee.

The employee’s or a qualifying family member’s serious health condition.

Any qualifying exigency arising out of a family member’s active military duty, or serious injury or illness resulting from that duty.

What are the policy requirements?  In order to qualify for the credit, an employer must have a written policy that provides at least two weeks of paid annual leave for full-time employees, and a pro-rata amount of leave for part-time employees. The policy must pay an employee at least half of the wages which would normally be paid and must cover all qualifying employees. To qualify, employees must be employed for more than one year, and cannot be paid more than a certain amount. ($72,000 for 2017).  If qualifying employees are not covered under the FMLA, the employer’s policy must include protections against interference with employees’ use of leave under the policy:

[Employer] will not interfere with, restrain, or deny the exercise of, or the attempt to exercise, any right provided under this policy. [Employer] will not discharge, or in any other manner discriminate against, any individual for opposing any practice prohibited by this policy.

IRS Guidance (Notice 2018-71).  In addition, the policy may not allow leaves of absence other than those listed above; for example, if a policy allows leaves for a non-serious health condition, or for personal reasons, the policy will not be in compliance with the applicable requirement, and the tax credit will not be available.

What are the deadlines?  Time is of the essence. If an employer adopts a qualifying policy by December 31, 2018, the employer can apply the policy retroactively to leave that was taken any time in 2018; the employer would receive the tax credit as long as all other requirements are met. In order to receive tax credits for leaves of absence taken after December 31, 2018, the policy must be in place at the time of the leave and cannot be established and applied retroactively.

Paid family and medical leave is a benefit that is highly valued by employees but can be costly.  Employers that already provide paid leave, or may provide paid leave in the future, may want to consider taking the opportunity to review current policies to determine if they can qualify for the tax credit.