Officials at the Internal Revenue Service are starting to set up a major new employer tax credit program, for a new paid family and medical leave tax credit.
The Tax Cuts and Jobs Act of 2017 (TCJA) — Public Law 115-97 — created the tax credit by adding Section 45S to the Internal Revenue Code.
The IRC Section 45S tax credit will help an employer exclude part of the costs involved with providing paid family and medical leave from taxable income.
The IRS talked about its 45S regulation-writing effort Wednesday, in Notice 2018-71.
In a set of questions and answers included in the notice, IRS officials make it clear that the new tax credit regulations could have a big effect on anyone involved with short-term disability insurance or professional employer organizations (PEOs).
One possible change: The regulations could push many kinds of eligibility restrictions, including pre-existing condition exclusions, out of group short-term disability plans.
How will 45S work?
The 45S tax credit is supposed to reimburse employers for part of the cost of offering paid leave to full-time and part-time employees.
Types of paid leave affected: Leaves for purposes that make an employee eligible for leave under the federal Family and Medical Leave Act of 1993 (FMLA).
Eligible employers: An employer is eligible if it offers employees at least two weeks of paid FMLA leave per year, with the minimum level of eligible leave pay being 50% of the employee’s usual wages.
Amount of paid FMLA leave affected: An employer can get the tax credit for providing up to 12 weeks of paid FMLA leave for a qualifying employee per taxable year.
Employees who are eligible: A qualifying employee must have earned $72,000 or less from the employer in the preceding year.
Size of tax credit: The credit can range from 12.5% to 25% of the leave-period wages paid, depending on the percentage of the employee’s usual wages. The credit will amount to 6.25% to 12.5% of what the employee’s usual wages would be if the employee had collected full pay during the leave.
What’s in the new IRS notice for insurance agents?
One thing that’s clear is that an employer that wants to get the tax credit will need professional help with writing its FMLA paid leave policy.
IRS officials describe many types of employer leave policies that would keep an employer from using the 45S tax credit.
IRS officials also answer many questions about how they think short-term disability insurance plans and PEO arrangements would interact with the 45S tax credit.
One of the questions is this: “May paid leave provided pursuant to an employer’s short-term disability program be characterized as family and medical leave under section 45S?”
The IRS answer is: “Yes.”
“Paid leave provided under an employer’s short-term disability program, whether self-insured by an employer or provided through a short-term disability insurance, may be characterized as family and medical leave under Section 45S if it otherwise meets the requirements to be family and medical leave under Section 45S,” officials say.