The IRS recently issued guidance on the new employer paid leave tax credit (codified as Code Section 45S), which was included in the tax reform law passed late last year. Employers that implement written policies complying with the new IRS guidance (including administration of those policies) by year-end may take advantage of the tax credit for the 2018 tax year. The credit available to employers under the tax code can total between 12.5% and 25% of the qualifying wages paid for those qualifying leaves (depending on the percentage of pay provided to employees during leave). An employer must have a written policy that meets the IRS requirements to receive the credit. Under the requirements, the paid leave policy must:
- cover all qualifying employees (employees who earned $72,000 or less in the prior year and who have been employed for at least one year);
- provide for at least two weeks of paid family and medical leave annually for each full-time employee (and a proportionate amount for part-time employees);
- include the same types of leave required by the Family and Medical Leave Act (FMLA) (e.g. birth/adoption of a child, care for a serious health condition of an immediate family member or self, etc.);
- provide for payment of at least 50% of qualifying wages during the leave; and
- include certain non-interference language addressing those employees who are not covered
under the FMLA.
The IRS guidance requirements exclude certain types of leave from qualifying for the tax credit, including:
- vacation, sick or personal leave for reasons not covered by FMLA;
- any leave that can be used for any other (non-FMLA) reason; and
- any leave that is paid for by state or local government or that is required to be paid by the employer under state or local law.
An employer’s short-term disability program, self-insured or fully insured, may qualify for the credit if it otherwise meets the requirements.
Employers should consider implementing a written policy before year-end to claim the credit on 2018 taxes. As long as employers adopt a policy and bring practices into compliance with the terms of that policy (including any necessary retroactive leave payments) before December 31, 2018, they will be able to claim the tax credit for the 2018 tax year. Please contact us for more information.