FMLA Credit – Who is Eligible and How to Claim the Credit?
On September 24, 2018, the IRS issued Notice 2018-71 in regards to the new Section 45S, which provides a general business credit for employers who provide paid family and medical leave to their employees. Additionally, the guidance allows employers to establish or amend qualifying paid family leave programs by December 31, 2018, in order to retroactively claim the credit for qualifying leave previously provided during 2018. The credit applies to wages paid in tax years beginning after December 31, 2017, and before January 1, 2020.
To claim the credit, an employer must have a written policy for paid family and medical leave that meets the following requirements:
- Must cover all qualifying employees. Qualifying employees are those that have been employed for a year or more and were not compensated more than a specified amount during the preceding year ($72,000 in 2017, not including bonus).
- Must guarantee that all qualifying full-time employees will receive at least two weeks of paid family and medical leave; and a proportionate amount of leave for qualifying part-time employees. An employee does not have to work a certain number of hours a year to be a qualifying employee.
- Must provide payment for at least 50% of a qualifying employee’s normal wages while on leave. Overtime (other than regularly scheduled overtime) and discretionary bonuses are excluded from normal wages paid.
- Must include a “non-interference” provision if the employer has any employee(s) not covered by the Family Medical Leave Act of 1993. The Notice provides sample language of a non-interference provision.
An employer’s written policy may only provide qualifying family and medical leave for any of the following purposes:
- Birth of an employee’s child and care for the child.
- Placement of a child with the employee for adoption or foster care.
- Care for an employee’s spouse, child or parent who has a serious health condition.
- A serious health condition that makes the employee unable to perform the functions of his or her position.
- Any qualifying exigency due to an employee’s spouse, child or parent being on covered active duty in the Armed Forces.
- Care for a service member who is the employee’s spouse, child, parent or next of kin.
The written policy may provide leave for care of additional individuals not specified above, such as care of grandchildren and grandparents; however, this paid leave does not qualify for the credit. Additionally, any leave paid by a state or local government or required by state or local law does not qualify for the credit.
Who is an eligible employer? 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.
How is the credit calculated? The credit is calculated by applying the applicable percentage to the amount of wages paid to the qualifying employee during any period (up to 12 weeks) that the employee is on family and medical leave. The “base” applicable percentage is 12.5 percent, which applies when the employer’s rate of payment is 50 percent of the qualifying employee’s normal wages. The “base” applicable percentage then increases by 0.25 percentage points for each percentage point by which the rate of payment exceeds 50 percent, not to exceed a total of 25 percent.
Example 1: Employer’s written policy provides each qualifying employee with two weeks of annual paid family and medical leave at a rate of payment of 60 percent of the employee’s normal wages. Because the rate of payment is 10 percentage points higher than the required 50 percent, the base applicable percentage of 12.5 percent is increased by 2.5 percent (0.25 multiplied by 10) for a total applicable percentage of 15 percent.
Example 2: Same facts as Example 1, plus during 2018 employee takes two weeks of leave under the policy. Employee is normally paid $1,000 per week. Therefore, employer pays employee a total of $1,200 ($600 per week for two weeks) for family and medical leave. Assuming all requirements for the credit are met, the employer can claim a credit of $180 with respect to this specific employee (15 percent of $1,200).
How is the credit claimed? In order to claim the credit, an eligible employer must file IRS Form 8994, Employer Credit for Paid Family and Medical Leave, and IRS Form 3800, General Business Credit, with its tax return.
See Notice 2018-71 for additional information, question and answers, and examples.
For more information, please contact Brandy Vannoy, CPA, Partner, or Mandy Pierce, CPA, Senior Manager through our contact us page.