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IRS Employer Tax Credit Regs Could Reshape Group Disability Plans

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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.

(Related: Republicans Post Text of ACA Individual Mandate Proposal)

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.

What could the 45S tax credit do to short-term disability insurance plans?

The tax credit regulations could, possibly, push insurers, and designers of self-insured disability plans, to eliminate most of the current eligibility restrictions.

IRS officials talk about the effect of short-term disability benefits restrictions on access to the 45S tax credit in their answer to Question 15.

Officials note that employers can get the 45S tax credit only if they make 45S-qualified leave available to all employees, including part-time employees, new employees, and new employees who have pre-existing conditions, such as back problems or cancer.

Officials suggest that they might later write a regulation that would let an employer exclude certain employees with a very low number of hours.

But, for now, officials say, an employer that wants to get the 45S tax credit must make paid FMLA leave available to every employee who earned less than $72,000 in the preceding year.

That means that, if an employer wants to use its fully insured, or self-insured, short-term disability plan benefits to meet the 45S wage-continuation requirements, the short-term disability plan must cover all employees who earned less than $72,000 in the preceding year, without any exceptions, officials say.

If, for example, an employer hired an employee with a bad back, the employer used a short-term disability plan to meet its 45S paid-leave obligations, and the employer’s short-term disability plan excluded coverage for the back-pain-related disability for the employee’s first six months on the job, the IRS would see that as a problem, officials say.

“The plan will not in all cases cover all qualifying employees, and employer may not claim the credit under Section 45S for paid family and medical leave provided under the written policy with respect to any employees,” officials say.

What’s in the new notice that might be of interest to PEOs?

In an answer to Question 25, IRS officials talk about how they think the 45S tax credit would affect leave wages paid through an insurer, a PEO, or a Certified Professional Employer organization.

The eligible employer “for whom qualifying employees perform services” could collect the tax credit, but the PEO or other third-party payer could not, officials say.

An eligible employer would get the tax credit by filing IRS Form 8994, “Employer Credit for Paid Family and Medical Leave,” and IRS Form 3800, “General Business Credit.”

The new tax filing requirements could create opportunities for agents who sell group short-term disability coverage or PEO services to work with tax accountants.

What live IRS humans are working on the 45S tax credit regulations?

The IRS lists Dara Alderman as the principal author of Notice 2018-71.

How can you shape the draft 45S tax credit regulations?

IRS officials note that they have not yet started the official drafting process.

Members of the public can still comments on what they think the upcoming draft regulations should look like. The comments are due Nov. 23.


A copy of IRS Notice 2018-71 is available here.

A set of IRS questions and answers about the 45S tax credit is available here.

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