The Tax Cuts and Jobs Act (TCJA) created a new general business tax credit for certain businesses that grant their qualifying employees paid family and medical leave in 2018 and 2019. The Internal Revenue Service (IRS) now has released guidance that also allows employers currently without a paid family and medical leave policy to adopt a retroactive policy before year-end and claim the credit for 2018.
How Can Your Business Become Eligible for the Credit?
IRS guidance explains that an eligible employer must have a written policy that:
- Covers all qualifying employees.
- Provides at least two weeks of annual paid family and medical leave for each full-time qualifying employee and at least a proportionate amount of leave for each part-time qualifying employee (qualifying employees who customarily work fewer than 30 hours per week).
- Provides leave pay at a rate of at least 50% of the qualifying employee’s wages.
- Includes language providing “noninterference” protections, if the employer has any qualifying employees who aren’t covered by the federal Family and Medical Leave Act (FMLA) (for example, because they don’t work 1,250 hours per year).
Noninterference language generally must ensure that the employer won’t 1) interfere with the exercise of any right provided by the policy, or 2) fire or otherwise discriminate against individuals who oppose any practice prohibited by the policy. The notice also makes clear that an employer that isn’t subject to the FMLA—because none of its employees are covered by the law—still can be eligible for the credit if the policy includes the noninterference language.
The written policy must be “in place” before the leave is taken to qualify for the credit. A policy is considered in place on the later of its adoption date or effective date. But the guidance provides a transition rule for 2018. The IRS will deem a written leave policy or amendment to be in place as of the effective date, rather than a subsequent adoption date, as long as it’s adopted on or before December 31, 2018, and the employer applies it retroactively for the entire period the policy or amendment covers.
What Types of Leave Are Covered?
The credit generally is available only if the leave is specifically designated for an FMLA purpose and cannot be used for any other reason. In addition, paid leave provided under the employer’s short-term disability program can be characterized as family and medical leave if it otherwise meets the requirements to be such leave. It can qualify as covered leave whether self-insured or provided through a short-term disability insurance policy.
The leave must be available to all qualifying employees who have worked at the company for at least one year and whose compensation for the preceding year doesn’t exceed 60% of the “amount applicable” for that year. For 2017, the amount applicable is $120,000, so a qualifying employee in 2018 may have earned no more than $72,000 (60% of $120,000) in 2017. For a part-time qualifying employee, the paid leave ratio must be at least equal to the ratio of the employee’s expected weekly hours to the expected weekly hours of a non-part-time qualifying employee.
The guidance also explains how to determine an employee’s normal wages to ensure the employee is, as required, paid at least 50% of those wages while on leave. Overtime (other than regularly scheduled overtime) and discretionary bonuses aren’t included in wages. Any leave paid by a state or local government, or required by state or local law, doesn’t count toward the amount of paid family and medical leave provided by the employer, the rate of pay, or, in turn, the credit.
Employers aren’t required to use the same pay rate or leave period for every qualifying employee or FMLA purpose. For example, an employer could provide six weeks of leave at 100% pay for childbirth or adoption, or to care for the child, but only two weeks at 75% pay for all other purposes. Similarly, an employer could provide two weeks of leave to every qualifying employee, with an extra two weeks for qualifying employees with at least 10 years of service. The policy cannot, however, exclude any class of qualifying employees, such as unionized employees, from paid leave.
How Is the Credit Amount Determined?
The amount of the credit begins at 12.5% of wages paid for up to 12 weeks per tax year. The percentage rises incrementally as the rate of leave payment exceeds 50% of the normal wages, with a maximum credit of 25% when full wages are paid for the leave. The term “wages” generally encompasses all remuneration for employment.
Be aware that wages don’t include any amounts taken into account for other general business credits. It The wages do, however, include wages paid by a third-party payer (for example, an insurance company or professional employer organization) or through an employer’s short-term disability program for leave taken into account for the leave credit. And employers that claim the leave credit must reduce their wage/salary deduction by the credit amount.
What Are the Next steps?
If your organization does not currently have an FMLA policy, it is not too late to implement one prior to 2018’s end. For more information regarding the family and medical leave credit, or if you have questions about how it applies to your organization, contact a PYA executive below at (800) 270-9629.
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