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Federal Tax Reform Adds Tax Credit for Paid FMLA Leave

2.27.2018

The federal tax reform signed into law on December 22, 2017 added a potential tax credit for employers who provide paid family and medical leave to their employees. Here are the details:

  • An “eligible employer” may claim a general business credit of 12.5% of wages paid to a qualifying employee on FMLA leave, plus 0.25% of wages (up to a total credit of 25%) for each % point by which FMLA pay exceeds 50% of the employee’s normal pay. (Creates tax credit range of 12.5%-25%)
  • An “eligible employer” is one with a FMLA policy that: (a) allows all qualifying, full-time employees at least two weeks of annual paid family and medical leave; (b) allows part-time employees paid leave on a pro rata basis; and (c) provides leave pay of at least 50% of an employee’s normal pay.
  • Vacation leave, personal leave, and other medical or sick leave is not considered family and medical leave, and leave paid by a state or local government, or required under state or local law, is not eligible for this tax credit.
  • It is unclear without further guidance whether paid time off available for another purpose that can also be used concurrently with FMLA to make the FMLA period paid entitles an employer to this tax credit.
  • A “qualifying employee” is an employee who has been employed by an employer for at least one year, and whose compensation in the prior year did not exceed 60% of the compensation threshold for highly compensated employees (this threshold was $120,000 for 2017). So, an employee must have earned $72,000 ($120,000 x 60%) or less in 2017 to entitle the employer to this tax credit for paid FMLA leave provided to that employee in 2018.
  • The paid FMLA leave terms must be provided to employees in a written policy. An employer may decline this credit and instead deduct the amount of paid leave. The employer may not deduct any wages for which it instead claims the credit; it must elect one or the other. This tax credit will only be available in 2018 and 2019 unless Congress extends it. Regulations from the IRS are needed to clarify the scope of this tax credit and restrictions on taking it.

Whether it makes sense for an employer to implement a new policy or modify an existing policy to take advantage of this tax credit depends on careful analysis of expected FMLA usage by the company’s employees in the coming year and consideration of the unknowns remaining until the IRS issues regulations. We will publish additional guidance for employers when IRS regulations are released, but in the meantime, employers interested in creating policies that qualify for the tax credit should consult counsel to collaborate on the appropriate language for such policies.

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