by Marti Cardi, Esq. - Senior Compliance Consultant and Legal Counsel
September 25, 2018
On September 24, 2018, the federal Office of Associate Chief Counsel (Tax Exempt and Government Entities) issued a Notice providing guidance on the employer tax credit for paid family and medical leave under §45S of the Internal Revenue Code. Notice 2018-71 does not have the force of regulations which are yet to come, but it does offer employers with much-needed interpretive direction on how the tax credit works and what an employer must do to claim the credit.
We previously blogged about the tax credit when it was passed, and I am happy to say that nothing in the Notice contradicts our interpretations back then. You can read our summary of the tax credit here. I suggest you go back and read our prior blog post before proceeding here – it will all make more sense!
Possible extension of tax credit. The tax credit is set to expire on December 31, 2019 – and so is in effect for only 2 years! However, on September 6 the US Senate introduced a bill (S. 3412) that would extend the tax credit by 3 years, through December 31, 2022. This bill also would require a study to examine the effectiveness of the tax credit for paid family and medical leave. We’ll be watching and will report any significant movement on that bill.
Highlights of Notice 2018-71. The Notice has questions and answers on the following topics:
- Eligible Employers
- Family and Medical Leave
- Minimum Paid Leave Requirements
- Calculating and Claiming the Credit
- Effective Date
Here are some of the more helpful bits of guidance. All of these answers and examples depend, of course, upon the employer’s policy otherwise meeting all the requirements for the paid leave tax credit.
- Required policy provision – non-interference. 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. One of the policy requirements is 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. The Notice provides some sample language for
a policy provision that will satisfy this requirement. Q&A 3 - Effective date of tax credit for your policy. An employer’s written policy demonstrating compliance with the tax
credit law must be effective before the paid leave is taken; but for 2018, this can include a policy with a retroactive
effective date if the employer pays the leave benefit to any employees who took leave after the retroactive
effective date. Q&A 5 and 6 - Purposes for use of paid leave. The employer’s paid leave must be available only for FMLA leave reasons to
qualify for the tax credit.- So, for example, a paid leave policy that allows an employee to use the paid leave for vacation as well as
FMLA leave reasons would not qualify for the tax credit. Q&A 9 - On the other hand, a policy that limits the pay benefit to FMLA-covered reasons but includes family
relationships not covered by the FMLA (g., siblings or grandparents) will get partial coverage by the tax
credit. Any leave time taken to care for a spouse, for example, will qualify for the tax credit, while other
time taken to care for a sibling will not, even it the employee provides a pay benefit for both. Q&A 10 - The employer’s policy does not need to provide paid leave for all FMLA leave reasons. The Notice
provides the example of an employer who offers 6 weeks of paid leave only for parental/bonding leave.
Any paid leave provided pursuant to that policy will qualify for the tax credit even though other FMLA
leave reasons are not covered. Q&A 9
- So, for example, a paid leave policy that allows an employee to use the paid leave for vacation as well as
- Existing short term disability plans can count! Paid leave provided under an employer’s short-term disability
program, whether self-insured by an employer or provided through a short-term disability insurance policy,
may be characterized as family and medical leave under § 45S if it otherwise meets the requirements for the
tax credit. Q&A 11
The Notice provides much more information and examples regarding calculation of wages, the tax credit, and many other issues. If your company is considering taking advantage of this tax credit, do yourself a favor and read the full Notice.
PINGS FOR EMPLOYERS
Our recommendations at this time remain the same as when we first blogged about the federal PFML tax credit. Remember, Matrix is not a tax or financial advisor, so you need to:
- 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 or what changes you need to make to
qualify. - 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 credits 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. Even if the law
is extended by 3 years as proposed by Senate bill 3412, taking away the benefit might not be a good employee
relations move at a later date.
MATRIX CAN HELP!
As state and federal programs proliferate, Matrix provides leave, disability, and accommodation management services to employers seeking a comprehensive and compliant solution to these complex employer obligations. We monitor the many leave laws being passed around the country and specialize in understanding how they work together.
If you have questions, contact your Account Manager or [email protected].