In a Notice and accompanying news release, IRS has provided guidance, in the form of questions and answers (Q&As), on the new Code Sec. 45S employer credit for paid family and medical leave, which was added to the Code by the Tax Cuts and Jobs Act (TCJA; P.L. 115-97, 12/22/2017). IRS also announced its intent to issue proposed regs on the credit.
Background. Generally, Code Sec. 45S provides that, for wages paid in tax years beginning in 2018 and 2019, “eligible employers” can claim a general business credit equal to the “applicable percentage” of the amount of wages paid to “qualifying employees” during any period in which such employees are on “family and medical leave” if certain requirements are met. The credit doesn’t apply to wages paid in tax years beginning after Dec. 31, 2019.
To be eligible to claim the credit, an employer must have a written policy that satisfies certain requirements. (Code Sec. 45S(c)(1)) 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. (Code Sec. 45S(d)(1)) 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. (Code Sec. 45S(c)(1)(A)) Third, the policy must provide for payment of at least 50% of the qualifying employee’s wages while the employee is on leave. (Code Sec. 45S(c)(1)(B)) Fourth, if an employer employs qualifying employees who are not covered by title I of the Family Medical Leave Act (FMLA), the employer’s written policy must include language providing certain “non-interference” protections. (Code Sec. 45S(c)(2))
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. (Code Sec. 45S(c)(4)) 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) under Code Sec. 3306(b), determined without regard to the $7,000 FUTA wage limitation. (Code Sec.45S(g))
IRS had previously issued frequently asked questions (FAQs) on the credit in April, which provided very basic guidance on the credit and indicated that additional information would be provided later. See “FAQs provide guidance on employer-paid family and medical leave credit.”
New guidance. Notice 2018-71 provides 34 sets of Q&As addressing which employers are eligible to claim the credit, what constitutes “family and medical leave,” requirements that an employer’s written policy must meet for the employer to be eligible to claim the credit, and how to calculate and claim the credit.
Eligible employer. The Q&As make the following clarifications on what constitutes an “eligible employer” and what must be included in a “written policy”:
- . . . An employer does not have to be subject to title 1 of the FMLA to be an “eligible employer” under Code Sec. 45S. (Q&A-1)
- . . . The non-interference language, which must be included in the written policy if the employer employs any “qualifying employees” who aren’t covered by title I of the FMLA, and which also must be complied with to be an eligible employer, 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. (Q&A-3) Sample language is provided.
- . . . An eligible employer’s written policy may be set forth in a single document or in multiple documents, and also may be included in the same document that governs the employer’s other leave policies. (Q&A-4)
- . . . In general, the employer’s written policy must be “in place” (defined as the later of the adoption or effective date) before the paid family and medical leave for which the employer claims the credit is taken. (Q&A-5) But for an employer’s first tax year beginning after Dec. 31, 2017, the written leave policy (or amendment to a new or existing policy) will be considered in place as of the effective date of the policy or amendment, rather than a later adoption date, provided that certain requirements are met. (Q&A-6)
- . . . An eligible employer is not required to provide notice to employees that it has a written policy in place providing for paid family and medical leave under Code Sec. 45S. (Q&A-7)
Family and medical leave. The Q&As provide the following guidance on what constitutes family and medical leave for Code Sec. 45S purposes:
- . . . “Family and medical leave” means leave for any one or more of the following purposes: the birth of a child of the employee and in order to care for the child; the placement of a child with the employee for adoption or foster care; caring for the spouse, or a child, or parent of the employee (FMLA individuals) if that individual has a serious health condition; a serious health condition that makes the employee unable to perform the functions of the employee’s position; any “qualifying exigency” arising out of the fact that an FMLA individual 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); and caring for a covered service member with a serious injury or illness if the employee is the spouse, child, parent, or next of kin of the service member (collectively, the FMLA purposes). (Q&A-8)
- . . . In general, 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. (Q&A-9) However, if a written policy provides for leave that otherwise would be for an FMLA purpose, except that the leave is available to care for additional individuals other than FMLA individuals (e.g., a grandchild), this won’t prevent the leave from being considered specifically designated for an FMLA purpose, but the employer can’t claim the credit for any leave taken to care for non-FMLA individuals. (Q&A-10)
- . . . Paid leave provided under an employer’s short-term disability program 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. (Q&A-11)
Minimum paid leave requirements. The Q&As clarify several aspects concerning the minimum requirements that a written policy must meet in order for an employer to be eligible to claim the Code Sec. 45S credit, including:
- . . . A qualifying employee is an employee who has been employed by the employer for one year or more, and whose compensation for the preceding year does not exceed 60% of the “highly compensated employee” threshold amount under Code Sec. 414(q)(1)(B)(i). For 2017, the Code Sec. 414(q)(1)(B)(i) amount is $120,000, so to be a qualifying employee in 2018, an employee must have earned no more than $72,000 in compensation in 2017. (Q&A-12)
- . . . In determining whether an employee has been employed for one year or more, an employer may, pending further guidance, use any reasonable method. IRS cautioned, however, that any requirement that an employee work 12 consecutive months to be a qualifying employee would not be viewed as reasonable. (Q&A-13)
- . . . There is no minimum number of hours that an employee must work per year to be considered a qualifying employee. Pending further guidance, IRS warned that 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. (Q&A-14)
- . . . The written policy may not exclude any classification of employees from eligibility for paid family and medical leave. (Q&A-15)
- . . . A “part-time employee” is an employee who is customarily employed for fewer than 30 hours per week. Pending further guidance, an employer may use any reasonable method to determine how many hours an employee customarily works per week for the employer. (Q&A-17)
- . . . In determining the rate of payment under the policy or whether the 50% minimum rate is met, leave paid by a State or local government or required under State or local law is not taken into account. (Q&A-18; Q&A-21) “Wages normally paid to an employee” means the wages normally paid to the employee for services performed for the employer, excluding overtime (other than regularly-scheduled overtime) and discretionary bonuses. Pending further guidance, for employees who are paid (in whole or in part) on a basis other than a salaried or hourly rate, an employer must determine wages normally paid to the employee using the rules for determining regular rate of pay under the Fair labor Standards Act (FLSA). (Q&A-19)
- . . . The rate of payment or period of paid family and medical leave provided under an employer’s written policy does not need to be uniform with respect to all qualifying employees and for all FMLA purposes. However, to the extent an employer’s policy provides different rates of payment or periods of paid family and medical leave for different FMLA purposes, the minimum paid leave requirements must be satisfied with respect to each FMLA purpose for which the employer intends to claim the credit.(Q&A-20)
Calculating and claiming the credit. The Q&As offer guidance on how the Code Sec. 45S credit is calculated, including guidance on what constitutes “wages” for this purpose:
- . . . The “applicable percentage” under Code Sec. 45S(a)(1) is based on the rate of payment for the leave under the employer’s policy. The base applicable percentage of 12.5% applies if the rate of payment is 50% and this amount is increased by 0.25 percentage points for each percentage point by which the rate of payment exceeds 50% (for a maximum applicable percentage of 25%). (Q&A-22)
- . . . 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. (Q&A-23)
- . . . For purposes of Code Sec. 45S, “wages” don’t include any amount taken into account for purposes of determining any other credit allowed under Code Sec. 38 (general business credit). (Q&A-24) Wages paid by a third-party payer (e.g., a PEO) to qualifying employees for services performed for an eligible employer are considered wages for purposes of Code Sec. 45S (Q&A-25), and wages paid through an employer’s short-term disability program for family and medical leave are also taken into account in determining the credit (provided that the program meets the minimum paid leave requirements). (Q&A-27) However, leave paid by a State or local government or requirement by State or local law is not taken into account in determining the credit. (Q&A-26)
- . . . An eligible employer may claim the credit only with respect to wages paid to an employee who is a qualifying employee at the time family and medical leave is taken. (Q&A-28)
- . . . Only an eligible employer for whom qualifying employees perform services may claim the credit with respect to wages paid.(Q&A-29)
- . . . An employer that claims the Code Sec. 45S credit must reduce its Code Sec. 280C(a) deduction for wages or salaries paid by the amount of the credit. (Q&A-30)
- . . . To claim the credit, an eligible employer must file Form 8994, Employer Credit for Paid Family and Medical Leave, and Form 3800, General Business Credit, with its tax return. (Q&A-31)
- . . . Pending further guidance, in determining the normal hourly wage rate of an employee who is not paid an hourly wage rate for Code Sec. 45S(b)(1) purposes, an employer may use any reasonable method to convert the normal wages paid to an employee who is not paid an hourly wage rate to an hourly rate. (Q&A-32)
- . . . Employers are not aggregated under Code Sec. 45S for purposes of calculating the credit, except for purposes of Code Sec. 45S(h)(1), which provides that a taxpayer may elect to have Code Sec. 45S not apply for any tax year. (Q&A-33)
- . . . The Code Sec. 45S(h) election (to claim or not to claim the credit) is made separately by each member of a controlled group of corporations and each member of a group of businesses under common control. However, in the case of a consolidated group (as defined in Reg. § 1.1502-1(h)), the election is made by the agent (as defined in Reg. § 1.1502-77) of the group.(Q&A-34)
Effective date. Notice 2018-71 is effective as of Sept. 24, 2018, and applies to wages paid in taxable years beginning after Dec. 31, 2017, and before Jan. 1, 2020.