Certain employers that provide paid leave under the Family and Medical Leave Act (“FMLA”) may be eligible to receive a general business tax credit for tax years beginning in 2018 and 2019. While the FMLA provides certain job-protected leave, it does not require such leave to be paid. The new law incentivizes employers to provide wage replacement.
Specifically, Section 13403 of the Tax Cuts and Jobs Act signed by the President on December 22, 2017 adds a new section to the Internal Revenue Code (section 45S), which generally allows eligible employers to claim a general business tax credit equal to at least 12.5% of the amount of wages paid to qualifying employees during any period which such employees are on FMLA leave. However, the rate of payment must be at least 50% of the wages normally paid to the employee and must be provided pursuant to written policy.
- Tax Credit Amount. The amount of the tax credit ranges from 12.5% to 25% of the cost of each hour of paid FMLA leave (the credit is increased by 0.25 percentage points for each percentage point by which the rate of payment exceeds 50%), depending on how much of an employee’s regular earnings the benefit replaces. The maximum amount of FMLA leave that may be taken into account with respect to any employee for a taxable year is 12 weeks.
- Written Policy Required. In order for an employer to qualify for the incentive, the employer must have a written policy in place which (1) provides qualified employees with not less than 2 weeks of annual paid FMLA leave (prorated for non-full time employees); and (2) requires that the rate of payment under the program be not less than 50% of the wages normally paid to such employee for services performed for the employer.
- Qualifying Employee. The tax credit applies to wages paid to “qualifying employees.” A “qualifying employee” is defined as any employee who (1) has been employed by the employer for at least one year; and (2) for the preceding year was paid no more than 60% of the “highly compensated employee” dollar threshold (i.e., $72,000 for 2018).
- Mandated State or Local Paid Leave Does Not Apply. The credit does not apply to any leave which is paid by a state or local government or required by state or local law.
The new tax credit is a bonus for any employer that already offers paid FMLA leave and is a great incentive to explore for employers considering offering paid FMLA leave. If you would like further information related to the new tax credit or would like assistance drafting or revising your company’s FMLA policies in order to qualify for the tax credit, please contact us.
This alert serves as a general summary of lengthy and comprehensive new provisions of the Internal Revenue Code. It does not constitute legal guidance. Please contact us with any specific questions.
Questions? Email Beth Latchana or Samantha Kopacz
Elizabeth H. Latchana specializes in employee health and welfare benefits. Recognized for her outstanding legal work, she was selected as the 2015 “Lawyer of the Year” in Lansing for Employee Benefits (ERISA) Law by Best Lawyers. Contact her for more information on this reminder or other matters at 517.377.0826 or firstname.lastname@example.org.
Samantha A. Kopacz focuses her practice on emloyee health and welfare benefits, including ERISA, HIPAA, PPACA, COBRA, IRC, and other federal laws. Contact her for more information on this reminder or other matters at 517.377.0868 or email@example.com.