Paid Family Leave Tax Credit: Additional Guidance Issued (article)
The Tax Cuts and Jobs Act enacted last December added a new tax credit wages paid to qualifying employees during any period in which an employee is absent from work due to a family and medical leave event. An employer is eligible for a general business tax credit under Code Section 45S if it has a separate written policy in place that allows all qualifying full-time employees a minimum of two weeks of annual paid family and medical leave. The policy must also allow non-full time qualifying employees a comparable amount of leave on a pro rata basis. Important to note that this credit is available to an employer without regard to whether it is subject to the federal Family and Medical Leave Act (FMLA), as long as the employer maintains the written policy that meets the wage payment criteria. The credit generally is effective only for wages paid in taxable years of the employer beginning after December 31, 2017, and before January 1, 2020.
Earlier this year, the Internal Revenue Service released guidance relating to the paid family leave tax credit (see IRS Guidance: Paid Family Leave Credit, Benefit Beat, 5/31/18). On September 24, 2018, the IRS released additional guidance in a question and answer format (IRS Notice 2018-71) providing further clarifications. The recently issued guidance outlines the requirements an employer must satisfy to be an eligible employer, the types of leave, the minimum paid leave requirements, calculation of the credit, and the impact of state-mandated leave. Any employer contemplating seeking the tax credit should study this guidance, simply to ensure whether they are entitled to the credit.
With regard to the written policy requirement, the guidance makes the following clarifications:
- As long as the employer’s paid leave policy is adopted by December 31, 2018, or an existing policy is amended by that date, the credit can be taken for the entire 2018 tax year.
- If an employer employs at least one qualifying employee who is not covered by FMLA, for example, one who works less than 1,250 hours per year, the employer must include “non-interference” language in its written policy. This applies to an employer subject to FMLA that employs at least one qualifying employee who is not covered by the FMLA, as well as to an employer who is not subject to FMLA. The IRS provides some sample language that can be used for this purpose:
“[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.”
The guidance affirms that the paid family leave plan for the types of leave for which the credit can be requested are restricted to FMLA events; specifically, birth or adoption of a child, leave to care for the serious health condition of an individual or his/her family member (as defined by FMLA), as well as leave for certain military exigency events.
The guidance clarifies that the credit can be taken even if the leave is through a short term disability plan as long as it is for an FMLA reason. The tax credit is not available for paid leave required by state or local law.
For purposes of claiming the credit, an employer would file a Form 8994, Employer Credit for Paid Family and Medical Leave, together with its tax return and Form 3800, General Business Credit. The IRS is expected to be releasing a draft Form 8994 in the near future.