2018 Tax Reform Series: Is Your Company Eligible for a Tax Credit for Paid Leave?
Below is the third article in our series covering the employee benefits-related changes contained in the Tax Cuts and Jobs Act signed by the President on December 22, 2017.
The Act provides employers with a welcome tax credit for offering paid family and medical leave to employees – at least for 2018 and 2019. If your company voluntarily offers paid family and medical leave to rank and file employees or is considering offering such paid leave, read on!
New section 45S of the Internal Revenue Code provides a tax credit to employers that voluntarily offer up to twelve weeks of paid family and medical leave annually to qualifying employees pursuant to a written policy. To enjoy the tax credit, the leave benefit amount need not be equal to the employee’s normal pay, but must be at least 50% of that amount. The amount of the tax credit is 12.5% if the leave benefit amount equals 50% of normal pay. The 12.5% credit increases incrementally (up to a maximum of 25%) to the extent the leave benefit exceeds 50% of normal pay. A qualifying employee is one who has been employed by the employer for at least a year and who is paid no more than 60% of the “highly compensated employee” dollar amount on an annual basis (i.e., $72,000 for 2018).
To claim the tax credit, the written policy must provide full-time qualifying employees at least two weeks (annually) of paid family and medical leave and must provide part-time qualifying employees a proportionate amount of paid family leave (based on the part-time employee’s expected work hours). The policy must also specify the leave benefit (i.e., at least 50% of normal pay). Employers that provide paid family and medical leave for employees who aren’t covered under the Family and Medical Leave Act also must include a non-retaliation provision in the policy. Note that the credit does not apply with respect to paid leave that is mandated under state or local law.
Congress must revisit the paid leave credit in two years, so the tax credit might not motivate employers who are not already voluntarily offering paid family and medical leave to start doing so.