There has been a lot of talk in the news about the new tax law known as the Tax Cuts and Jobs Act of 2017, that was passed by Congress and signed into law in late December 2017. While most of the focus of the tax law was regarding the change in corporate and individual tax rates, it also included a new tax credit for employers who provide paid family and medical leave. Employers who wish to take advantage of this new tax credit will have to carefully design their paid family and medical leave policies to comply with the new law.  

Tax Credit

The new tax credit applies for taxable years starting January 1, 2018. The tax credit is not a dollar-for-dollar credit; rather, eligible employers are able to take up to a 25% credit of the amount paid to qualifying employees while on leave, depending on the percentage of the employee's wages paid while on leave. In order to take advantage of the credit, the employer must pay at least 50% of the employee's regular wages during the leave period. Providing only the minimum 50% of pay will result in a 12.5% tax credit. The tax credit increases as the percentage of pay during the leave increases, capping at a 25% credit. As of now, the tax credit is set to end for taxable years starting after December 31, 2019.

Eligible Employer

Employers who wish to take advantage of this new tax credit must have a written policy in place that provides for the paid family and medical leave benefit. The benefit must also be provided to all qualifying full-time employees and also to qualifying part-time employees on a pro-rata basis. The paid leave must be for at least a two-week period for full-time employees, and the maximum amount of leave taken into account for the tax credit is 12 weeks.

Family and Medical Leave

Under this new tax credit, the definition of "family and medical leave" mirrors the definition under the Family and Medical Leave Act of 1993. This means generally that the leave must be for a serious health condition of the employee, the care of an employee's dependent or spouse with a serious health condition, or the birth, adoption, or foster care of an employee's child.

Qualifying Employee

Qualifying employees for whom a tax credit can be claimed are employees, as defined under the Fair Labor Standards Act of 1938, who have been employed with the employer for at least one year and whose compensation for the preceding year does not exceed 60% of the compensation threshold for "highly compensated employees" under the Internal Revenue Code (i.e. $120,000 for 2017 and 2018).  This would mean that for 2018, the tax credit is only provided for paid leave for employees making no more than $72,000. Employers may still provide similar paid leave benefits to highly compensated employees, but the tax credit would not extend to paid leave benefits for these individuals.  

Next Steps

Employers who wish to take advantage of this tax credit should review and revise their paid leave policies to comply with the new law. Further, the Internal Revenue Service is likely to issue regulations interpreting the new law and employers should be on the lookout for these regulations. Only time will tell whether this new law will incentivize more employers to provide paid family and medical leave for their workforce.

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