A recently introduced bipartisan House bill (HR 8860) would extend and enhance a tax credit under Code Sec. 45S available to employers that offer paid family and medical leave to their staff. The bill has broad support and aligns with a Senate bill introduced earlier this year.
Current credit. The original Code Sec. 45S credit was established under the 2017 Tax Cuts and Jobs Act (PL 115-97) and was later extended through 2025. Under current law, a general business credit may be taken by employers that provide at least two weeks of paid family and medical leave to their full-time qualifying employees each year — prorated requirements apply for part-time employees. Qualifying employees are those who have been employed for at least a year and whose income falls under a certain annual threshold. And to claim the credit, employers must pay at least 50% of normal wages to qualifying employees who take the leave.
The current credit is calculated by taking a percentage of wages paid to qualifying employees for family and medical leave for up to 12 weeks in a tax year. The minimum credit is 12.5% for employers that pay out 50% of their employees’ regular wages during the leave time — but the credit is increased by 0.25% for each percentage point the leave payment rate exceeds 50%, up to a maximum of a 25% credit.
Proposed enhanced credit. In an effort to enhance the Code Sec. 45S credit, Representative Randy Feenstra (R-IA) led the introduction of The Paid Family and Medical Leave Tax Credit Extension and Enhancement Act (HR 8860), along with co-sponsors Representatives Stephanie Bice (R-OK), Marie Gluesenkamp Perez (D-WA), and Yadira Caraveo (D-CO). The bill also would make the credit permanent.
“[I]t’s important that employees of businesses both large and small have access to paid family and medical leave,” said Feenstra in a statement, but “there is still uncertainty for both businesses and their employees because [the 45S] tax credit … to help employers offer [the paid leave] expires next year.”
The proposed enhancements include expanding eligibility by reducing the minimum employment period for qualifying employees from one year to six months. The bill also would allow employers to claim a portion of their family and medical leave policy premiums paid during the taxable year — the claim for premium credits would be available to employers regardless of whether an employee took family and medical leave during the year. And the bill provides that state mandates for paid family and medical leave will not be taken into account in determining the credit.
One concern for lawmakers is small employers’ knowledge of the credit. “The 45S tax credit has helped many employers expand paid family leave benefits for their workers,” said Representative Bice in a statement, but “awareness and uptake of this credit have been lower than we’d like.” To that end, the bill calls for targeted outreach by the IRS and Small Business Administration to employers, tax professionals, and payroll service providers.
Senators Deb Fischer (R-NE) and Angus King (I-ME) introduced companion legislation (S 3680) back in January. And several groups have come out in support of the legislation, including the Association of International Certified Professional Accountants and the Society for Human Resource Management.
According to AICPA’s Melanie Lauridsen, the bill “should allow a greater number of employers to offer the benefit of paid family and medical leave to their employees by making the related tax credit permanent.” And Emily M. Dickens of SHRM said the bill “add[s] key improvements that will give human resource professionals the certainty needed for long-term benefits planning.”
The legislation also is in line with the House Paid Family Leave Working Group’s January framework for paid leave reform. In addition to extending and enhancing the Code Sec. 45S credit, that framework calls for a pilot to help states set up paid leave programs and assist those that already have such programs, the creation of an “Interstate Paid Leave Action Network” to coordinate and harmonize benefits across states, and association-style family and medical leave insurance pooling plans for small businesses.
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