The IRS has issued Notice 2018-71 which provides additional guidance on the paid Family and Medical Leave Act (“FMLA”) tax credit which was created by the Tax Cuts and Jobs Act of 2017.
The FMLA tax credit enables eligible employers to claim a general business tax credit of up to 25% of the wages paid to “qualifying employees” while they are on family and medical leave, subject to certain conditions.
For purposes of the FMLA tax credit, “family and medical leave” is leave for one or more of the following reasons:
- Birth of an employee’s child and to care for the child.
- Placement of a child with the employee for adoption or foster care.
- Care of the employee’s spouse, child, or parent who has a serious health condition.
- A serious health condition that makes the employee unable to perform the functions of his or her position.
- Any “qualifying exigency” due to an employee’s spouse, child, or parent being on covered active duty (or having been notified of an impending call or order to covered active duty) in the Armed Forces.
- Care of a service member who is the employee’s spouse, child, parent, or next of kin.
The FMLA tax credit is generally effective for wages paid in taxable years of the employer beginning after December 31, 2017. It is not available for wages paid in taxable years beginning after December 31, 2019.
Among other things, Notice 2018-71 provides that:
- An employer need not be subject to the FMLA to claim the tax credit.
- A “qualifying employee” is an employee who has been employed by the employer for one year or more, and whose compensation is no more than $72,000 in the prior year (as indexed). The employee does not have to be subject to the FMLA, and does not have to have worked a specified number of hours.
- For an employer to be eligible to claim the credit, the employer must have a written leave policy that:(a) provides at least two weeks of annual paid family and medical leave to all qualifying employees who are not part-time employees, and at least a proportionate amount of paid family and medical leave to qualifying employees who are part-time employees; (b) requires a rate of payment that is not less than 50 percent of wages; and, (c) includes specified “non-interference” language for employees who are not subject to FMLA protections. For purposes of the tax credit, a part-time employee is an employee who is customarily employed for fewer than 30 hours per week.
- For an employer’s first taxable year beginning after December 31, 2017, the written leave policy or an amendment to a policy will be considered to be retroactively in place as of the effective date of the policy (or amendment), rather than a later adoption date, if: (a) the policy is adopted on or before December 31, 2018; and, (b) the employer brings its leave practices into compliance with the terms of the retroactive policy for the entire period covered by the policy.
- 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 paid family and medical leave. However, any leave paid by a state or local government or required by state or local law will not be taken into account in determining the amount of the tax credit.
- The policy may not exclude any classification of employees (for example, collectively bargained employees) if they are qualifying employees.
- Wages paid to an employee for family and medical leave taken before an employee becomes a qualifying employee are excluded in determining the employer’s credit.
Notice 2018-71 is available at: https://www.irs.gov/pub/irs-drop/n-18-71.pdf