by Marti Cardi, Esq. - Senior Compliance Consultant and Legal Counsel
& Gail Cohen, Esq. - Assistant General Counsel, Employment and Litigation
January 04, 2018
One might think that the Trump administration would trumpet (ahem . . . ) the supposed family-friendly and employer-friendly provisions of the new Tax Cuts and Jobs Act. Not so. A little-publicized provision of the new Act establishes a tax credit for employers who provide paid family and/or medical leave to employees within certain parameters. Your guess is as good as mine as to why this provision has flown under the radar. But not under the Matrix Radar!
The tax code provision is based on a bill previously introduced into the House and Senate as the Strong Families Act, which has received strong criticism from pro-family groups. Google it and you can find websites criticizing and supporting the Strong Families Act. Politics aside, let’s take a look at what is now the law. (But please remember, we at Matrix are not tax advisors – consult your own attorneys or tax advisors for specific details!)
You can review the specific provisions of the law at the link above – the “Employer Credit for Paid Family and Medical Leave” starts at page 221 of the bill (page 223 of the PDF).
Summary. The Tax Cuts and Jobs Act (the “Act”) provides employers with a partial tax credit for wage benefits paid to employees during leave taken for reasons covered by the federal Family and Medical Leave Act (“FMLA”). But note this: The credit is in effect only for tax years 2018 and 2019, and then automatically sunsets unless Congress takes further action.
Employee and employer coverage. The tax credit coverage is not limited to employees and employers covered by the FMLA. Benefits paid to full time and part time employees are covered by the tax credit. However, to qualify for the tax credit, payments must be to employees who:
- Have been employed by the employer for at least 1 year
- The Act does not specify whether that has to be 12 consecutive months of employment
or whether, like FMLA eligibility, the employee only needs to have worked an aggregate
total of 1 year
- The Act does not specify whether that has to be 12 consecutive months of employment
- Make no more than $72,000 per year
Employers may voluntarily provide paid family leave to employees who are not eligible for FMLA leave (called “added employees” in the Act) and receive the tax credit for such payments as long as the employer has a policy that complies with the Act. So, for example, an employer could provide paid leave benefits to an employee who has not worked 1250 hours in the past 12 months, or who has already exhausted their FMLA entitlement, and still get the tax credit. “Added employers” with fewer than 50 employees or those with small worksites not covered by the FMLA can also make paid leave benefits available to employees and use the tax credit.
Policy requirements include a minimum of 2 weeks of paid leave benefit, a provision against interference with the employee’s policy rights to paid leave, and a provision against termination of an employee for complaining about a violation of the policy.
Leave reasons. Leave benefits must be paid for one or more of the leave reasons available under the FMLA – the employee’s own serious health condition, a family member’s serious health condition, birth or placement of and bonding with a new child, military exigencies, and caring for a seriously ill or injured servicemember. An employer’s policy does not need to cover all of the FMLA leave reasons to qualify for the tax credit. For example, an employer may provide paid leave only for bonding with a new child and still qualify for the tax credit if all other conditions are met.
Amount of leave. The employer’s policy must provide at least 2 weeks of paid leave. The maximum amount of paid leave that qualifies for the tax credit is limited to 12 weeks per employee in a 12-month period (the same as FMLA leave rights).
Percentage of pay provided. The employer must provide a paid leave benefit of at least 50% of the employee’s wages (as defined in the tax code – I’m not going there!).
Amount of tax credit. An employer providing paid family and/or medical leave benefits can receive a tax credit ranging from 12.5% to 25% of the amount paid to the employee. The credit starts at 12.5% of benefits paid at the 50% level and caps at a 25% credit for benefits paid at full wage replacement. For every percentage point over 50% of wages that the employer pays in benefits, the tax credit increases by one-quarter of a percent. Examples:
| Percentage of Paid Leave Benefit | Percentage Points above 50% | Multiplied by 0.25% | Employer’s tax credit percentage |
| 50% | 0 | 0 x 0.25% = 0 | 12.5% |
| 70% | 20 | 20 x 0.25% = 5% | Base 12.5% + 5% = 17.5% tax credit |
| 90% | 40 | 40 x 0.25% = 10% | Base 12.5% + 10% = 22.5% tax credit |
| 100% | 50 | 50 x 0.25% = 12.5% | Base 12.5% +12.5% = 25% tax credit |
Applicable tax years. The paid family leave tax credit is available only in tax years 2018 and 2019, unless extended by Congress. Otherwise, it expires automatically on December 31, 2019.
Relationship to state/local paid family leave. The Act provides that any leave which is paid or required by a state or local government is not taken into account in determining the amount of the tax credit. Thus, the credit applies only to benefits paid voluntarily, not required by state or local law.
PINGS FOR EMPLOYERS
- Consult your tax advisor. As with all things tax-related, you should consult with your tax advisor
to determine whether your existing plan is covered by the new paid leave tax credit. - Consult your financial advisor. If you don’t have a paid leave plan for your employees, consult
with your financial (and tax) advisor to determine whether the incentive provided by the tax credit
is enough to justify offering a paid leave benefit to your employees. - Consider benefits beyond monetary. In this day of strong competition for good employees,
remember that a superior benefits package can be a lure. But, with the tax credit scheduled to
last only two years, also consider whether your company can continue the benefit if the tax
credit expires on December 31, 2019. Taking away the benefit might not be a good employee
relations move at that time.
MATRIX CAN HELP! At Matrix we offer a full suite of leave of absence and disability management tools. This includes management of employer-specific leave plans, as well as FMLA, state leave laws, leave (and more) as an ADA accommodation, and disability plans. To learn more, ping us at [email protected].