Tax Bill Provides Tax Credit for Qualifying Medical Leave

  • January 29, 2018

The new tax bill which was recently enacted into law allows a tax credit for employers who provide employees with paid family and medical leave.  If the requirements of the credit are met, businesses will receive a reduction in their federal income taxes based on the amount of paid leave provided to employees.

The amount of the tax credit will be a percentage of the wages paid by the employer to employees on family and medical leave.  That percentage increases gradually based on the level of normal pay that is replaced while the employee is on leave, ranging from a minimum of 12.5% (if the employer pays one-half of regular wages) to a maximum of 25% (if the employer provides the full rate of normal pay while the employee is on family and medical leave).

The tax credit is currently available to employers only for two years and will expire after 2019.

The requirements for an employer to claim the credit generally include the following:

  • The employer must have a written policy which: (i) requires that full-time employees receive at least two weeks of paid family and medical leave each year (with part-time employees receiving a pro-rated minimum amount based on hours worked); (ii) provides that employees will receive at least 50% of their normal pay while on family and medical leave; and (iii) includes a non-retaliation provision if the employee is not covered by the Family and Medical Leave Act (FMLA).
  • The employer may not provide employees with more than 12 weeks of paid family and medical leave each year.
  • An employer may claim the credit only with respect to paid leave provided to “Qualifying Employees” who (i) have been employed for at least one year, and (ii) for the preceding year, had total compensation which did not exceed a specified threshold, which may be adjusted for inflation. An employee must have made $72,000 or less in 2017 to be a Qualifying Employee for the credit in 2018.
  •  The leave must generally be for one of the purposes permitted under the FMLA (i.e., birth or adoption of a child, care of a spouse, child or parent with a serious medical condition, etc.). Other types of paid leave, such as vacation leave, personal leave, or sick leave which is not for a FMLA-recognized purpose cannot be counted towards the amount of the credit. Paid leave which is mandated by state or local law is also not eligible for the credit.

While the leave must be for a purpose recognized under the FMLA, it appears that the tax credit is not limited strictly to FMLA leave.  Thus, the tax credit may be claimed by employers who are not subject to the FMLA, and may be claimed with respect to employees who are not otherwise eligible for FMLA leave, as long as the employer has established a written paid leave policy which meets all the requirements necessary for the credit.

Most employers wishing to take advantage of the tax credit will need to revise their leave policies in order to be eligible for the tax credit.

For further information or inquiries regarding the new tax credit for paid family and medical leave, please contact Brian A. Ritchie at [email protected].