Pension & Benefits News IRS issues guidance on employer credit for paid family and medical leave
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Monday, October 1, 2018

IRS issues guidance on employer credit for paid family and medical leave

By Pension and Benefits Editorial Staff

The IRS has issued a notice that provides guidance on the employer credit for paid family and medical leave under Code Sec. 45S. The notice also announced that the Department of the Treasury and the IRS intend to publish proposed regulations under Code Sec. 45S. The notice is effective as of September 24, 2018, and applies to wages paid in taxable years beginning after December 31, 2017, and before January 1, 2020.

The Tax Cuts and Jobs Act (P.L. 115-97) added Code Sec. 45S, which establishes a business credit for employers that provide paid family and medical leave. The credit is equal to a percentage of wages paid to qualifying employees while they are on family and medical leave. The purposes for which an employee may take family and medical leave under Code Sec. 45S are the same purposes for which an employee may take family and medical leave under the FMLA.

Eligible employer. An employer does not have to be subject to title I of the FMLA to be an eligible employer under Code Sec. 45S. Any employer will be an eligible employer if it has a written policy in place that provides paid family and medical leave, satisfies the minimum paid leave requirements and, if applicable, includes the required “non-interference” language.

If an employer employs at least one qualifying employee who is not covered by title I of the FMLA (including any employee who is not covered by title I of the FMLA because he or she works less than 1,250 hours per year), in accordance with Code Sec. 45S(c)(2), the employer must include “non-interference” language in its written policy and comply with this language to be an eligible employer. This requirement applies to: (a) an employer subject to title I of the FMLA that has at least one qualifying employee who is not covered by title I of the FMLA, and (b) an employer not subject to title I of the FMLA (that, thus, has no employees covered by title I of the FMLA).

The “non-interference” language must ensure that the employer will not interfere with, restrain, or deny the exercise of, or the attempt to exercise, any right provided under the policy, and will not discharge, or in any other manner discriminate against, any individual for opposing any practice prohibited by the policy.

Effective date of policy. For an employer’s first taxable year beginning after December 31, 2017, a written leave policy or an amendment to a policy (whether it is a new policy for the taxable year or an existing policy) will be considered to be in place as of the effective date of the policy (or amendment), rather than a later adoption date, if (a) the policy (or amendment) 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 (or retroactive amendment) for the entire period covered by the policy (or amendment), including making any retroactive leave payments no later than the last day of the taxable year.

Family and medical leave. The purposes for which an employee may take family and medical leave under Code Sec. 45S are the same purposes for which an employee may take family and medical leave under the FMLA.

Paid leave made available to an employee is considered family and medical leave under section 45S only if the leave is specifically designated for one or more FMLA purposes, may not be used for any other reason, and is not paid by a state or local government or required by state or local law.

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 Code Sec. 45S if it otherwise meets the requirements to be family and medical leave under Code Sec. 45S.

Qualifying employee. A qualifying employee is an employee (as defined in section 3(e) of the FLSA) who has been employed by the employer for one year or more, and whose compensation for the preceding year does not exceed an amount equal to 60 percent of the amount applicable for that year under Code Sec. 414(q)(1)(B)(i). For 2017, the applicable amount of compensation under Code Sec. 414(q)(1)(B)(i) is $120,000. Accordingly, to be a qualifying employee in 2018, an employee must have earned no more than $72,000 (60 percent of $120,000) in compensation in 2017 (or if applicable, in the employer’s fiscal year beginning in 2017).

Employment for one year. Until further guidance is issued, an employer may use any reasonable method to determine whether an employee has been employed for one year or more. Treating employees as employed for one year or more if they have been employed for 12 months, as set forth in Sec. 825.110(b) of the FMLA regulations is an example of a reasonable method. However, any requirement that an employee work 12 consecutive months to be a qualifying employee would not be viewed as a reasonable method for determining whether an employee has been employed for one year.

Code Sec. 45S does not require an employee to work a minimum number of hours per year to be a qualifying employee. Until further guidance is issued, any requirement that an employee work a minimum number of hours to be a qualifying employee would not be viewed as a reasonable method for determining whether an employee has been employed for one year. The rules under section 101(2)(A)(ii) of title I of the FMLA, which require an employee to work a minimum of 1,250 hours of service to be an eligible employee under the FMLA, do not apply to Code Sec. 45S.

Classifications of employees. An employer’s written policy must provide 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 annual paid family and medical leave to all qualifying employees who are part-time employees. The policy may not exclude any classification of employees (for example, collectively bargained employees) if they are qualifying employees.

Calculating and claiming the credit. Code Sec. 45S(a)(1) provides that, in the case of an eligible employer, the credit is an amount equal to the applicable percentage of the amount of wages paid to qualifying employees during any period in which the employees are on family and medical leave. Under Code Sec. 45S(a)(2), the term “applicable percentage” means 12.5 percent increased (but not above 25 percent) by 0.25 percentage points for each percentage point by which the rate of payment exceeds 50 percent.

The applicable percentage is based on the rate of payment for the leave under the employer’s policy. The base applicable percentage of 12.5 percent applies if the rate of payment is 50 percent. If the rate of payment under the policy is greater than 50 percent, the applicable percentage is increased by 0.25 percentage points for each percentage point by which the rate of payment exceeds 50 percent, up to a maximum applicable percentage of 25 percent.

The credit is equal to the applicable percentage of the amount of wages normally paid to a qualifying employee during any period (up to 12 weeks) that the employee is on family and medical leave.

Wages. Pursuant to Code Sec. 45S(g), the term “wages” has the same meaning given to that term by Code Sec. 3306(b) (regarding FUTA wages), determined without regard to the $7,000 FUTA wage limitation. Code Sec. 3306(b) generally defines wages as all remuneration for employment, as defined by Code Sec. 3306(c), subject to certain limitations. However, for purposes of Code Sec. 45S, the term “wages” does not include any amount taken into account for purposes of determining any other credit allowed under Code Sec. 38, which provides for several separate business-related credits.

Wages paid through an employer’s short-term disability program for family and medical leave are taken into account in determining the credit provided that the program (in combination with any other employer-paid leave arrangement) meets the minimum paid leave requirements.

Code Sec. 280C denies a deduction for wages or salaries paid for the taxable year equal to the amount of the credit. Under Code Sec. 280C(a), an employer’s deduction for wages paid is reduced by an amount equal to the amount of the credit.

An eligible employer must file IRS Form 8994, Employer Credit for Paid Family and Medical Leave, and IRS Form 3800, General Business Credit, with its tax return to claim the credit.

SOURCE: IRS Notice 2018-71, I.R.B. 2018-41, October 9, 2018.

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