The recently enacted Public Law No. 115-97, commonly referred to as the Tax Cuts and Jobs Act (the Act) includes considerable changes to the federal tax code – the most intricate tax reform in 31 years. Of the many provisions included in the Act, some were entirely new additions, including Section 45S, in affiliation to the Family and Medical Leave Act (FMLA).
What It Is
The Family and Medical Leave Act of 1993 is a U.S. labor law requiring employers to allow eligible employees up to 12 weeks of leave each calendar year. The Act applies to work leave of absence for certain qualified medical and/or family reasons, including personal or family illness, pregnancy, birth and care of a child; placement of a child (i.e. adoption or foster care placement); or family military leave. Under the FMLA, employees have the right to continue receiving employerbased health benefits during FMLA leave. However, under previous law, there was no provision for employers to pay employees while taking FMLA leave.
2018 Tax Reform
The Act, enacted December 22, 2017, includes the addition of Section 45S to the Internal Revenue Code (Code), providing a new general business credit. The tax credit incentive is offered to certain employers who voluntarily pay employee wages during FMLA leave – starting in 2018. The paid family medical leave credit can be applied to reduce U.S. taxpayer’s alternative minimum tax (AMT) – however, the credit does not apply to wages paid in tax years beginning after December 31, 2019.
The Act does not mandate FMLA pay, nor does it make any other changes under state or local law.
In order to be eligible for the tax incentive, employers must meet qualifications outlined by Congress. Employers must establish a written paid FMLA policy/plan and must include the following provisions:
- Employers must provide qualified full-time employees at least two weeks of paid family and medical leave annually
- Part-time employees must receive a pro-rated share of paid family and medical leave per year based on expected work hours
- Employees on leave must be paid at least 50 percent of normal wages
In order for an employee to take the 2-12 week family and medical leave, they must have been employed by their current employer for at least one year, and must have received less than $72,000 (as of 2018) of compensation in the prior year.
Businesses can claim a tax credit of 12.5 percent of wages, if the leave benefit amount equals 50 percent of the employee’s normal compensation – increasing the credit percentage by 0.25 percentage points for each percentage point over 50 percent of wages normally paid to the employee, up to as much as 25 percent. An employer must reduce its deduction for wages or salaries paid or incurred by the amount determined as a credit. Also, any wages taken into account in determining any other general business credit may not be used in determining this credit.
The credit is only eligible for family and medical leave – defined by the U.S. Department of Labor and does not include vacation, personal, or other medical or sick leave (unless it qualifies under the FMLA). In instances where the leave is paid by a state or local government, or required by state or local law, the benefits are not taken into account in determining the amount of paid family medical leave provided by the employer for purposes of the credit. However, the credit is available to employers not subject to FMLA, as long as they offer, in their policy, FMLA-like protections.
As a U.S. taxpayer, employers should consider the benefits of this tax credit incentive. If you already provide paid FMLA leave, review current policies and decipher if you’re eligible for the incentive. If you do not currently provide pay under FMLA leave, consider the monetary benefits you could receive if implemented.
In order to extend the 45S beyond the 2018 and 2019 tax years, Congress must amend the paid leave credit for tax years beginning January 1, 2020.
For further guidance, please consult your tax advisor.
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