The paid family leave credit under the new tax law is another provision that has many holes that need filling. Under the law, employers would have to provide at least two weeks of leave and compensate their workers at a minimum of 50% of their regular earnings. The tax credit would range from 12.5% to 25% of the cost of each hour of paid leave, depending on how much of a worker’s regular earnings the benefit replaces. The credit starts at 12.5% of the benefit’s costs if workers receive half of their regular earnings, rising incrementally up to 25% if workers receive their entire regular earnings. Not all employees who take family medical leave would be eligible to count toward the credit. Employees who earn below $72,000 per year are eligible for this credit to apply. It should be noted that tax credit is voluntary, and the credit is only available for two tax years.
This provision raises a number of issues. First, what does it mean to provide at least two weeks of family medical leave? For employers who are covered under Family and Medical Leave Act (FMLA), two weeks of leave are a given to be available. In addition, for those employers who are in jurisdictions that dictate family medical leave (e.g. Chicago, New York State, federal contractors, etc.), most set a minimum number of days (5 to 7 generally) of leave that must be available. These leaves generally are broader than typical FMLA leave. Depending on the jurisdiction, the leave may be paid or unpaid, and if paid, it may be through employer or through the jurisdiction (e.g. California).
For smaller employers not covered by FMLA leave and for situations that do not qualify for regular FMLA leave but may qualify under the appropriate jurisdiction, no credit would be available unless 1) the employer provides a minimum of two weeks (10 days) of leave, and the leave would have to be paid at a minimum of 50% of current salary. Therefore, to gain the credit, employers would have to make their sick leave policy at least two weeks, make the sick leave policy broad enough to meet FMLA and local jurisdiction requirements, and somehow pay employees for that time off.
How does the leave need to be paid? For many organizations with PTO, that leave would generally be characterized as PTO for payment purposes. But what if an employee runs out of PTO and the leave would be granted, but unpaid? Presumably the law is literal, and the employee would have to paid for the employer to gain the credit. For employers with separate sick and vacation banks, presumably the policy would have to require one or the other banks to be used for sick time to be able to gain the credit. Or does the employer need to have a separate sick bank for FMLA leave apart from any other leave category like PTO?
And what about the situation of a blended salary payment to an employee on FMLA. If a third party pays part of the leave and the employer kicks in additional salary to ensure the thresholds are met, will the employer be able to take advantage of any credit for the added salary?
In addition, a question arises as to the parameters of the FMLA type leave. Traditionally, FMLA will apply to situations that are covered by disability as well as by workers compensation. If an employee is receiving short-term disability, presumably the credit is only for those payments made by the employer, not by the insurance company (but see blended payment question above). Therefore, employers who self-insure should get the benefit of the credit. On the other hand, in a workers’ compensation situation, generally workers comp does not kick in until the 8th day. In this situation it should be unlikely that the employer will get the benefit.
And what if an employee who at the time was earning less than $72,000 but at end of year earns as much or more whether by raises or incentive compensation? Is the credit available in this situation?
Then there are the administrative questions as to how to track the leave. For organizations not subject to FMLA requirements, should they use FMLA paperwork to assure that the leave is used for FMLA purposes? For organizations covered by FMLA requirements, do they need to be more exact in characterizing leave in their payroll systems, especially if leave is intermittent? Many payroll systems are not sufficient for tracking purposes, and many employers do not use FMLA tracking software. This problem could become a real headache for those employers wanting to avail themselves of the credit.
In the end, the paid family leave credit is one in which there are so many variations that employers will not likely make use of it – and it is only available for two years. Until there is IRS guidance on this issue, there are too many unknowns and unanswered questions for employers. However, given the benefit of the credit, HR needs to work with management and the CFO to see whether the costs of gathering and tracking the information is worth the benefits of the credit.