IRS Issues Retroactive Guidance on Employer Credit for Paid Family and Medical Leave

(Parker Tax Publishing October 2018)

The IRS issued a notice in a question and answer format on the employer credit for paid family and medical leave under Code Sec. 45S, a provision enacted in the Tax Cuts and Jobs Act of 2017. According to the IRS, it plans to publish proposed regulations under the provision but, until then, the guidance supplied in the notice applies to wages paid in tax years beginning after December 31, 2017, and before January 1, 2020. Notice 2018-71.

Background

Code Sec. 45S was enacted by the Tax Cuts and Jobs Act of 2017 (TCJA). It establishes a business credit for employers that provide paid family and medical leave (the credit). 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 Family and Medical Leave Act of 1993 (FMLA).

To be eligible to claim the credit, an employer must have a written policy that satisfies certain requirements. First, the policy must cover all qualifying employees; that is, all employees who have been employed for a year or more and were paid not more than a specified amount during the preceding year. In general, in determining whether an employee is a qualifying employee in 2018, the employee must not have had compensation from the employer of more than $72,000 in 2017. Second, the policy must provide at least two weeks of annual paid family and medical leave for each full-time qualifying employee and at least a proportionate amount of leave for each part-time qualifying employee. Third, the policy must provide for payment of at least 50 percent of the qualifying employee's wages while the employee is on leave. Fourth, if an employer employs qualifying employees who are not covered by FMLA, the employer's written policy must include language providing "non-interference" protections (see below). Thus, the written policy must incorporate the substantive rules that must be met in order for an employer to be eligible for the credit.

Any leave paid by a state or local government or required by state or local law is not taken into account for any purpose in determining the amount of paid family and medical leave provided by the employer. Thus, any such leave is not taken into account in determining the amount of paid family and medical leave provided by the employer, the rate of payment under the employer's written policy, or the determination of the credit.

For purposes of the credit, an employer is any person for whom an individual performs services as an employee under the usual common law rules applicable in determining the employer-employee relationship. Similarly, wages qualifying for the credit generally have the same meaning as wages subject to the Federal Unemployment Tax Act (FUTA), determined without regard to the $7,000 FUTA wage limitation.

In Notice 2018-71, the IRS provides additional guidance on the credit in question and answer form. This guidance applies to wages paid in tax years beginning after December 31, 2017, and before January 1, 2020.

With respect to businesses that are eligible employers for purposes of the credit, Notice 2018-71 provides that any employer will be an eligible employer under Code Sec. 45S if it has a written policy in place that provides paid family and medical leave, satisfies certain minimum paid leave requirements, and, if applicable, includes the "non-interference" language described below.

Written Policy Requirement

To be eligible for the credit, an eligible employer's written policy must provide paid family and medical leave that meets certain requirements. Generally, the written policy must provide all qualifying employees with at least two weeks of paid family and medical leave (prorated for part-time employees), at a rate of at least 50 percent of the employee's normal wages. In addition, if the employer employs any qualifying employees who are not covered by FMLA, the employer's written policy must include certain "non-interference" language which ensures 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. The following "non-interference" language is an example provided by the IRS of a written provision that would satisfy Code Sec. 45S:

[Employer] will not interfere with, restrain, or deny the exercise of, or the attempt to exercise, any right provided under this policy. [Employer] will not discharge, or in any other manner discriminate against, any individual for opposing any practice prohibited by this policy.

The eligible employer's written policy may be set forth in a single document or in multiple documents. For example, an employer may maintain different documents to cover different classifications of employees or different types of leave, and those documents collectively will constitute the employer's written policy under Code Sec. 45S. An eligible employer's written policy may also be included in the same document that governs the employer's other leave policies. However, if an employer's written policy provides paid leave for FMLA purposes and additional paid leave for other reasons (such as vacation or personal leave), only the leave specifically designated for FMLA purposes is considered to be qualifying family and medical leave.

With the exception of a transition rule for the first tax year of an employer beginning after December 31, 2017, the employer's written policy must be in place before the paid family and medical leave for which the employer claims the credit is taken. The written policy is considered to be in place on the later of the policy's adoption date or the policy's effective date. For example, if an employer adopts a written policy that satisfies all of the requirements of Code Sec. 45S on June 15, 2019, with an effective date of July 1, 2019, and assuming all other requirements for the credit are met, the employer may claim the credit for leave taken on or after July 1, 2019.

For an employer's first tax year beginning after December 31, 2017, a written leave policy or an amendment to a policy (whether it is a new policy for the tax 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 (i) the policy (or amendment) is adopted on or before December 31, 2018, and (ii) 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.

Example: Employer ABC is a calendar year business and Employee X takes two weeks of unpaid family and medical leave beginning January 15, 2018. ABC adopts a written policy that satisfies the requirements of Code Sec. 45S on October 1, 2018, and chooses to make the policy effective retroactive to January 1, 2018. At the time the policy is adopted, ABC pays Employee X (at a rate of payment provided by the policy) for the two weeks of unpaid leave taken in January 2018. Assuming all other requirements for the credit are met, ABC may claim the credit with respect to the family and medical leave paid to Employee X for the leave taken in January 2018.

Compliance Tip: Code Sec. 45S does not impose a notice requirement with respect to the written policy on employers. However, if an employer chooses to provide notice of the written policy to qualifying employees, the policy will not be considered to provide for paid leave to all qualifying employees as required under Code Sec. 45S, unless the availability of paid leave is communicated to employees in a manner reasonably designed to reach each qualifying employee. This may include, for example, email communication, use of internal websites, employee handbooks, or posted displays in employee work areas.

Family and Medical Leave Qualifying for the Credit

An eligible employer may claim the credit only with respect to paid family and medical leave, which is defined as leave for any one or more of the purposes described under FMLA Section 102(a)(1)(A), (B), (C), (D), or (E) or FMLA Section 102(a)(3), whether the leave is provided under the FMLA or by a policy of the employer. If an employer provides paid leave as vacation leave, personal leave, or medical or sick leave (other than leave specifically for one or more of the FMLA purposes), that paid leave is not considered family and medical leave for purposes of the credit. The FMLA purposes for which paid family and medical leave under Code Sec. 45S may be provided are:

(a) the birth of a son or daughter of the employee and in order to care for the son or daughter;

(b) the placement of a son or daughter with the employee for adoption or foster care;

(c) caring for the spouse, or a son, daughter, or parent, of the employee, if the spouse, son, daughter, or parent has a serious health condition;

(d) a serious health condition that makes the employee unable to perform the functions of the employee's position;

(e) any qualifying exigency (as the Secretary of Labor, by regulation, determines) arising out of the fact that the spouse, or a son, daughter, or parent of the employee is a member of the Armed Forces (including the National Guard and Reserves) who is on covered active duty (or has been notified of an impending call or order to covered active duty); or

(f) caring for a covered service member with a serious injury or illness if the employee is the spouse, son, daughter, parent, or next of kin of the service member.

The FMLA purposes are the purposes for which an employee may take leave under the FMLA. The terms used in this Q&A-8 have the same meaning as defined in section 825.102 of the FMLA regulations, 29 CFR Sec. 825.102.

Except for one narrow exception discussed below, paid leave made available to an employee is considered family and medical leave under Code Sec. 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.

Example: Employer ABC's written policy provides six weeks of annual paid leave for the birth of an employee's child, and to care for that child (an FMLA purpose). The leave may not be used for any other reason. No paid leave is provided by a state or local government or required by state or local law. ABC's policy provides six weeks of family and medical leave under Code Sec. 45S.

Example: Employer ABC's written policy provides three weeks of annual paid leave that is specifically designated for any FMLA purpose and may not be used for any other reason. No paid leave is provided by a state or local government or required by state or local law. ABC's policy provides three weeks of family and medical leave under Code Sec. 45S.

Example: Employer ABC's written policy provides three weeks of annual paid leave for any of the following reasons: FMLA purposes, minor illness, vacation, or specified personal reasons. No paid leave is provided by a state or local government or required by state or local law. In this case, ABC's policy does not provide family and medical leave under Code Sec. 45S because the leave is not specifically designated for one or more FMLA purposes and can be used for reasons other than FMLA purposes. This is true even if an employee uses the leave for an FMLA purpose.

In the limited circumstance where an employer's written policy provides paid leave that otherwise would be specifically designated for an FMLA purpose (for example, to care for a spouse, child, or parent who has a serious medical condition), except for the fact that the leave is available to care for additional individuals not specified in the FMLA (for example, a grandchild, or grandparent who has a serious medical condition), the fact that the leave could also be used to care for additional individuals for whom care under the FMLA purpose is not required does not prevent the leave from being considered specifically designated for an FMLA purpose. However, the employer may not claim the credit for any leave taken to care for an individual other than a qualifying employee's spouse, parent, or child.

Minimum Paid Leave Requirements

For an employer to be eligible to claim the credit, an employer's written policy must meet the following minimum requirements with respect to paid family and medical leave:

(1) the 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 paid family and medical leave to qualifying employees who are part-time employees,

(2) the policy must require a rate of payment that is not less than 50 percent of the wages normally paid to the qualifying employee for services performed for the employer, and

(3) if the employer employs one or more qualifying employees who are not covered by title I of the FMLA, the employer's written policy also must include the "non-interference" language previously described.

Any leave that is paid by a state or local government or required by a state or local law is not taken into account for any purpose in determining the amount of paid family and medical leave provided by the employer.

A qualifying employee for this purpose is an employee (as defined in Section 3(e) of the Fair Labor Standards Act of 1938, as amended (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 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).

For a discussion of the employer credit for paid family and medical leave, see Parker Tax ¶105,401.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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