In 1993, then President Bill Clinton sought to find a support system to aid the rapid growth in the workforce, which was increasingly made up of women with families. The Family and Medical Leave Act (FMLA) was passed “to balance the demands of the workplace with the needs of families.” This Act allowed both women and men to participate in work, but also protect them if a medical need arose. Under this Federal Act, employers with fifty of more employees were required to provide up to twelve weeks to attend to serious health conditions of the employee, a parent, spouse or child. It also provided for pregnancy and care of a newborn, adopted child or foster child.
In order to qualify, the employee needed to have worked in the business for at least twelve month and worked at least 1,250 hours over the past twelve months. (In 2008, different requirements and time periods were given to active duty families. This leave was unpaid leave, and merely protected the employee’s right to benefits during the leave and return to their job or one of equal level, compensation and benefits. Note that highly compensated employees have more limited rights when it comes to FMLA.States are allowed to extend the benefits to FMLA if they so choose. By 2016, four states had increased the benefits to include paid leave. In 2019, Washington state will join California, New Jersey, Rhode Island, and New York. Other states have dropped the threshold from fifty employees to less, and some have expanded coverage terms. In 2008, the Act was amended to broaden the definition of family member for military families to include next of kin and adult children. In 2010, the definition of “son and daughter” was clarified to ensure that the benefits covered those employees who assume the role of caring for a child regardless of their legal or biological relationship. This change, along with February 2015 decision by the Department of Labor to redefine the definition of spouse, allowed for FMLA leave rights to cover same-sex and common-law marriages. With these state level changes, some states also enacted payroll taxes to cover the increased payout costs and state programs and grants related to FMLA. It is important for employers to ensure that they understand the requirements of their state, along with any taxation regulations linked to FMLA.
A new tax credit related to FMLA is available to eligible employers, even if they are exempt from providing FMLA. Eligible employers are ones that have a written policy in place by the end of 2018 that requires the employer to provide at least two weeks of paid leave to qualified full time employees. Part time employees can count towards eligibility if the leave is prorated for part time employees. It is important to note that the IRS has stated that eligibility is calculated on expected normal work hours. Overtime unless it is regularly scheduled, and discretionary bonuses are excluded from this calculation. This credit is currently only available for the 2018 and 2019 tax years. Tax practitioners may come across this credit during the 2018 filing season and should be aware of how to calculate the credit.
Under the credit, the definition of eligible employee is different than those of FMLA. Again, under FMLA, the employee must have worked for the employer for a full year, not be highly compensated, and worked at least 1,250. For Sec. 45S, the employee does not have to work the full year consecutively and the employer can use any method reasonable to determine whether the employee has been employed for one year or more. Additionally, Section 45S does not require and employee to work the minimum number of hours per year to qualify. Highly compensated employee is defined for the credit as being paid more than sixty percent of the applicable amount under Section 414(q)(1(B). For 2018, the amount is $120,000, thereby making highly compensated employees anyone paid over $72,000.
Additionally, although FMLA allows for employees to elect, or employers to require, that employees substitute FMLA leave with any accrued vacation or sick leave, these leaves do not qualify for the tax credit unless that requirement is restricted to one or more of the following leave purposes:
- Birth and care of a newborn child of the employee;
- Placement of a child for adoption or foster with the employee;
- Care of the employee’s spouse, child or parent with a serious health condition;
- Employee’s inability to perform their duties due to serious health condition;
- Qualifying exigency arising from employee’s spouse, child or parent on covered active duty or call to active duty; or
- Employee who is the spouse, child, parent or next of kin to a covered servicemember to care for the service member
The FMLA credit equals an applicable percentage of the amount of wages paid to qualifying employees during their leave. The wages paid to the employee must be equal to or exceed fifty percent of their regular and normal wages, up to one-hundred percent of regular and normal wages. The credit’s applicable percentage is twelve and a half percent (12.5%) of the wages paid to the employee for leave during the calendar year and increases by 0.25 percentage points for each percentage point of wages paid for leave over fifty percent of normal wages. This means that the maximum credit is twenty-five percent (25%) which is made up of 12.5% plus (50% multiplied by 0.25%) of wages paid for leave at a rate of 100% of normal wages. The credit is limited to each employee’s hours of leave taken, multiplied by the employee’s normal hourly rate of pay when in service to the employer. The method for converting a non-hourly rate employee to hourly for this calculation will be established under IRS regulation Sec. 45S(b)(2). Until then, employers may use any reasonable method. The current suggested method is to utilize the Fair Labor Standards Act of 1938 (FLSA) to determine regular rate of pay. The employer must reduce the amount of the deduction claimed for wages and salaries paid by the amount of the leave credit. This credit, when combined with all general business credits, cannot exceed the taxpayer’s net income tax over the greater of the tentative minimum tax or twenty-five percent of the taxpayer’s net regular tax liability that exceeds $25,000. The excess, if eligible, can be carried back one year or forward twenty years.
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