Notice 2018-71 Details Employer Credit for Paid Family and Medical Leave

September 25, 2018


The Tax Cuts & Jobs Act created a new business credit for employers that provide paid family and medical leave to their employees. This credit was established by new IRC § 45S, and is in place effective for wages paid in tax years beginning after December 31, 2017 and before January 1, 2020. On September 24, 2018, IRS issued Notice 2018-71, which provides general guidance and a set of Q & As detailing the requirements of this new credit.

To be eligible for the credit, the employer must have a written policy that satisfies the following requirements:

  1. The policy must cover all qualifying employees, which includes those who have been employed for a year or more and were paid not more than a specified amount (i.e. $72,000 in 2017).
  2. The policy must provide at least two weeks of annual paid family and medical leave for each full-time qualifying employee and a proportionate amount of leave for each part-time qualifying employee.
  3. The policy must provide for a payment of at least 50 percent of the qualifying employee’s wages while the employee is on leave.
  4. If an employer employs qualifying employees who are not covered by the Family Medical Leave Act, the written policy must include certain “non-interference” protections.
    1. This includes, for example, employees who work less than 1,250 hours per year.
    2. “non-interference” language ensures that “the employer will not interfere with, restrain, or deny the exercise of, or the attempt to exercise, any right provided under the policy, and will not discharge, or in any other manner discriminate against, any individual for 0pposing any practice prohibited by the policy.” (Answer 3 of the Q & A provides a sample non-interference provision)

The purposes for which an employee may take family and medical leave under section 45S are the same purposes for which an employee may take family and medical leave under title I of the Family and Medical Leave Act of 1993, as amended (FMLA), Pub. L. 103–3; 29 U.S.C. sec. 2601. Leave paid by a state or local government or leave required by a state or local law is not taken into account for purposes of determining the amount of family and medical leave provided by the employer.

An “employer,” for purposes of the credit, include any person for whom an individual performs services as an employee under the usual common law rules applicable in determining employer-employee relationship. “Wages” qualifying for the credit means “wages” subject to the Federal Unemployment Tax Act (FUTA), pursuant to IRC § 3306(b), without regard to the $7,000 FUTA wage limitation.

The credit is equal to the “applicable percentage” of the amount of wages paid to qualifying employees while they are on leave. This applicable percentage is 12.5 percent, increased by .25 percentage points for each percent point by which the payment exceeds 50 percent of wages. This credit cannot exceed 25 percent. The credit can be calculated for a maximum of 12 weeks of wages for each qualifying employee.

The Q&A provides the following insight:

  • An employer need not be subject to title 1 of FMLA to be an eligible employer entitled to receive this new credit.
  • The employer’s written policy must generally be in place before the paid family and medical leave for which the employer claims the credit is taken. For the first taxable year beginning after December 31, 2017, however, the policy will be considered to be in place as of the effective date of the policy, rather than a later adoption date, as long as the employer makes all retroactive leave payments no later than the last day of the taxable year.
  • IRC § 45S does not impose a notice requirement on employers, but if the employer does choose to provide notice, it must do so in a manner reasonably designed to reach each qualifying employee.
  • The FMLA purposes for which paid family and medical leave may be provided include the following:
    • The birth of a son or daughter of the employee to care for the son or daughter
    • The placement of a son or daughter with the employee for adoption or foster care
    • Caring for a spouse, son, daughter, or parent with a serious health condition
    • A serious health condition making the employee unable to perform the functions of the employee’s position
    • Any qualified exigency arising out of a relative’s service in the Armed Forces
    • Caring for a covered service member with a serious injury or illness if that employee is a the spouse, son, daughter, parent or next of kin of the service member
  • The policy must specifically designate one or more FMLA purposes allowed for the leave and that leave cannot be provided for other, non-FMLA purposes
    • One narrow exception to this requirement is that the employer’s policy may allow leave to be used to care for additional persons not specified in the FMLA (i.e. grandparent). This will prevent otherwise qualifying leave from being eligible for the credit. The employer, however, will not receive the credit for any leave taken to care for an individual not included by the FMLA
  • Paid leave provided under a short-term disability policy may be characterized as FMLA, eligible for the 45S credit, if it otherwise meets the requirements. This is true even if the pay is covered by insurance.
  • Until further guidance is issued, employers may use “any reasonable method” to determine how many hours an employee customarily works or whether the employee has been employed for one year. But, an employee need not work a minimum number of hours to determine whether he or she has worked for one year. The 1,250 hours of service FMLA requirement does not apply to IRC § 45S.
  • Employers are denied a deduction for the cost of wages or salaries for the amount of the credit taken.
  • The credit will be claimed by filing IRS Form 8994 and IRS Form 3800.

IRS intends to issue proposed regulations detailing these requirements. Notice 2018-71 is effective as of September 24, 2018, and it applies to taxable years beginning after December 31, 2018, and before January 1, 2020.

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