Although the federal Family & Medical Leave Act (FMLA) does not require employers to provide paid leave, the Tax Cuts and Jobs Act, signed late last year by President Trump, provides a tax credit incentive beginning this year for employers who provide FMLA paid leave, if they meet a number of requirements. The tax credit does not apply to paid FMLA for tax years beginning after December 31, 2019.
To qualify for the tax credit, an employer (determined on a controlled group basis) must have a written policy under which:
all full-time “qualifying employees” are paid at least two weeks of FMLA leave per year, at a rate of pay equal to at least 50% of normal wages; and
part-time “qualifying employees” are paid not less than a pro-rata amount of what is paid to full-time qualifying employees. For this purpose “part-time” means employees customarily employed for fewer than 30 hours per week, and the pro-rata amount is determined based on the number of hours the part-time employee is expected to work, as compared to the hours an equivalent full-time employee is expected to work.
“Qualifying employees” are employees who:
have been employed by the employer for one year or more; and
for the preceding year had compensation not exceeding 60% of the compensation threshold for designation as a highly compensated employee under the Tax Code. For 2018 this amount is $72,000 (i.e., 60% of $120,000 under Code Section 414(q)(1)(B) for 2017).
It appears that an employer (on a controlled group basis) must offer all qualifying employees paid FMLA leave in order to qualify for the credit. For example, if an employer only offers paid FMLA leave to employees who make $50,000 or less, the employer would not qualify for the tax credit. Furthermore, if the employer offers paid FMLA leave to employees who make more than $72,000 in 2018, there is no tax credit for such employees. There are obvious morale issues if an employer offers paid FMLA leave to those employees making under $72,000, but does not offer paid FMLA leave to employees making over that arbitrary salary threshold.
Amount of Tax Credit
The tax credit is capped at 25% of employer-paid FMLA leave wages for qualifying employees paid 100% of their regular wages during their FMLA leave. To qualify for even the lowest tax credit of 12.5%, an employer must pay at least 50% of regular wages during the leave. The available tax credit then gradually increases up to the 25% maximum as the employer pays a larger percentage of qualifying employees’ regular wages.
An employer can take a tax credit for up to 12 weeks of paid FMLA leave per qualifying employee during a tax year.
Qualifying Paid Leave
Paid leave for the following purposes qualifies for the tax credit:
the birth of a child and to care for the child;
placement of a child with an employee for adoption or foster care;
to care for a spouse, a child, or a parent who has a serious health condition;
an employee’s serious health problem that makes the employee unable to perform the functions of his or her position; and
any qualifying exigency, as defined by the Secretary of Labor, due to a spouse, child, or a parent of the employee being covered on active duty in the Armed Forces.
Most importantly, if the FMLA leave is paid using vacation leave, personal leave, or medical or sick leave, such paid leave is not eligible for the tax credit. This could be problematic because many employers require employees to exhaust these types of paid leave while on FMLA. In addition, any leave that is paid by a state or local government, or is required by state or local law, is not eligible for the tax credit.
As with any new law, there are unanswered questions such as whether part-time employees will be exempt from the current 1,250 hours work requirement under the FMLA. Additionally, employers must consider whether it makes economic sense to pay 100% of an employee’s wages to receive a 25% tax credit for those payments. For employers who currently provide paid FMLA leave to all employees who make $72,000 or less per year, it may make sense to carefully review, and if necessary modify, their FMLA policies to ensure that they qualify for the tax credit. However, many employers will likely decide that the changes they must make to their current FMLA leave policies do not warrant trying to qualify for the tax credit.