Things in theory are sometimes better or easier than in practice. I like the idea behind this new credit, but the administrative nuances and short life span might be keeping it from being worth the time and effort spent to be meaningful for companies.
The Tax Cuts & Jobs Act created a new general business credit under Internal Revenue Code §45S called the Employer Credit for Paid Family and Medical Leave, which as its name states, gives a credit for qualifying businesses who pay qualifying employees while on FMLA type leave during tax years 2018 and 2019 (only). The credit is equal to a percentage ranging between 12.5% to 25% of wages paid to qualifying employees during this time, not to exceed a 12-week FMLA period per year.
The Family & Medical Leave Act (FMLA) requires employers to allow employees to take up to 12 weeks off work annually to deal with family or medical issues, but it does not require that time off to be paid. The new tax credit incentivizes companies to assist those employees by providing pay during that time. The credit is available to employers who are subject to FMLA as well as those who are not, but the credit is only available for FMLA-type leave, that is one or any of the following:
· The birth of an employee’s child
· The placement of a child with an employee for adoption or foster care
· To care for the employee’s spouse, child, or parent who has a serious health condition
· A serious health condition making the employee unable to work
· A qualifying exigency when an employee’s spouse, child, or parent is on active duty
· To care for a service member who is the employee’s spouse, child, parent or next of kin
Ok, so far so good. But, herein lies the first underestimated limitation: the written policy. At first it doesn’t sound like much, but again, in practice it can be when the devil is in the details. To be an eligible employer who may take the credit, there must be a written policy in place that:
· Gives no less than two weeks of annual paid FMLA type leave for full-time employees, and an equivalent pro-rated amount for part time employees.
This last part can be important because FMLA doesn’t have to cover certain employees working less than a certain number of hours, which creates disparity between normal FMLA policies and what needs to be written to qualify for the new tax credit. Also, many companies do not offer these benefits to part timers, so existing policies may not qualify as is if they have part time staff.
· Must also state that pay given during this time be at least 50% of the employee’s normal wages.
· Includes “non-interference” language if an employer has qualifying employees not covered under FMLA – see Notice 2018-71 , Question 3, for sample acceptable language.
This part is a little confusing, but I believe it’s requiring the policy to provide written job protection for employees taking leave under the policy who don’t qualify for FMLA protection, i.e. part timers who didn’t work at least 1250 hours per year that were mentioned above, or those working for small businesses with less than 50 employees.
The written policy must be in place before the paid FMLA type leave in order to take the credit, and is considered to be in place on the later of the policy’s adoption or effective date. However, a transition rule for 2018 allows policies that retroactively comply to be considered in place on the effective date, so long as it’s in place before December 31, 2018. For 2019, best to get on this sooner than later if a qualifying policy is not already in effect.
A qualifying employee has been employed by the employer for at least one year, and their previous year compensation was not greater than $72,000. The base 12.5% credit is increased by 0.25% for each percent the amount of FMLA pay exceeds 50% of the employee’s normal wages during that time, not to exceed a maximum credit of 25%.
Any government paid or mandated wages, sick leave, or PTO used by the employee during this FMLA period does not count towards qualifying wages paid for the purposes of this credit. The government mandated piece adds time because as we gather information to calculate this credit, we need to be sure to review state laws to know if certain types of leave require mandated paid leave or not.
Like other general business credits, the wages paid creating this credit may not double dip, and so the amount of the FMLA credit must reduce salary expense on the tax return. Also, qualifying wages used to determine any other general business credit may not be used in determining the FMLA credit.
The actual code for this credit is fairly short, but the related notice is 27 pages long of Q&A! Which is great, but just shows there’s more beneath the surface when you actually get into the mechanics of the credit. There are a lot of moving parts and someone needs to actually manage the whole process.
Existing pre tax reform policies will likely need revised if they have not been to take advantage of this credit, that means getting HR and legal involved. Review company policies carefully and amend if needed to fit the credit criteria. BUT, consider the business reasons as a whole, and don't change policy for just this tax credit, unless it makes sense for the company.
The payroll team will need to be aware that this data will need collected and reported to those on the income tax team. Tax will want to work with the HR and/or payroll team to make sure the data pulled matches the qualifying wage and qualifying employee criteria previously mentioned. A new account could be created to track wages paid in conjunction with this credit to facilitate calculations, but still the data output is only as good as the input and likely more sorting will be needed.
Again this credit is currently only for 2018 and 2019, so while this is a nice incentive for employers to pay those on FMLA type leave, cost benefit for both giving this benefit and the administrative burden behind setting it all up should be considered when the actual tax credit received may be small for a short period of time.
For more information and example scenarios, see IRS Notice 2018-71 or the IRS FAQs.
As always, this post is not meant as tax advice. Consult your tax advisor to see how this credit applies to your unique set of facts.
Amie K