Keeping Your Balance: Guidance issued regarding Paid Family and Medical Leave Credit

By Caitlin Langmead
BridgeTower Media Newswires

The IRS recently issued Notice 2018-71 providing guidance on the employer credit for paid family and medical leave under Section 45S of the Internal Revenue Code. Section 45S establishes a general business credit that employers may claim based on a certain percentage of wages paid to qualifying employees while they are on family and medical leave. Notice 2018-71 became effective as of Sept. 24, 2018 and applies to wages paid in taxable years beginning after Dec. 31, 2017 through Dec. 31, 2019.

There are several criteria that must be met in order for an employer to qualify for this credit. First, the employer must have a written policy in place that provides at least two weeks of paid leave annually to all qualifying employees (all employees who have been employed for over a year and were not paid more than $72,000 in 2017). In addition, the policy must provide paid leave of at least 50% of the qualifying employee's wages while they are on leave and the written policy must be in place before the leave.

However, this is dependent upon the on the policy's adoption date or effective date. For example, if an employer adopts a written policy that satisfies all the requirements of Section 45S in October 2018 but makes the policy effective as of January 2018 and reimburses qualifying employees for any unpaid leave taken up to that point, then the employer would still be eligible to take advantage of the credit in 2018.

The credit is calculated as 12.5% of qualifying wages paid to employees on medical leave increased by .25 percentage points for every percentage point that is above the 50% minimum requirement. For example, if an employer provides paid leave at a rate of 75% of wages, the credit would be calculated as 18.75% of those wages (12.5% for 50% then 6.25% for the remaining 25% (.25 x 25%)).

Also, the credit can only be calculated with respect to paid family and medical leave, which include the birth or adoption of a child, caring for a spouse, child or parent provided that they have a serious health condition, or a serious health condition that makes the employee unable to perform the functions of their position. However, if an employer provides paid leave as vacation leave, personal leave or medical/sick leave (other than the situations described above), then that paid leave is not considered family and medical leave under Section 45S and cannot be used to calculate the credit.

An interesting stipulation of this policy is that any leave paid by a state or local government or that is required by state or local law cannot be taken into account when determining the amount of paid family and medical leave provided by the employer. However, paid leave provided under an employer's short-term disability program, whether self-insured or provided through a short-term disability insurance policy, may be classified as family and medical leave under this Notice if it meets the other requirements of Section 45S.

Overall, this Notice provides guidance that the Treasury Department and IRS intend to incorporate into proposed regulations. However, the Treasury Department and IRS are requesting comments on the guidance, which must be submitted no later than Nov. 23, 2018. More information can be regarding this policy can be found at www.irs.gov, including several examples describing how certain scenarios apply to the proposed guidance.

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Caitlin Langmead, CPA, is a manager with Mengel, Metzger, Barr & Co. LLP and may be reached at clangmead@mmb-co.com.

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