On September 24, 2018, the IRS issued updated guidance in Notice 2018-71 (the Notice) on Internal Revenue Code section 45S, the business tax credit for employers that provide paid family and medical leave (the Credit). Under the Credit—which is in effect for calendar years 2018 and 2019 only—an employer that provides paid family and medical leave may claim a credit based on an employee’s qualifying wages. The Credit applies to employers that grant employees earning less than $72,000 in 2017 at least two weeks of annual paid family and medical leave for full-time employees, and a proportionate amount for part-time employees where the paid leave rate equals at least 50% of the employee’s qualifying wages. The Credit for employers may total between 12.5% and 25% of such qualifying wages. These rules were initially explained in prior IRS guidance found in FAQs on the IRS website.
The Notice 2018-71 covers five general topics in the familiar FAQ format:
(1) Who is an eligible employer?
(2) What constitutes family and medical leave?
(3) What are the minimum paid leave requirements?
(4) How to calculate and claim the credit? and
(5) What is the effective date?
Questions 1 through 7 address the first topic and cover issues relating to written plan document requirements and the intersection with the Family and Medical Leave Act (FMLA).
Questions 8 through 11 address the second topic and further define the kinds of leave that qualify as family and medical leave for purposes of the Credit.
Questions 12 through 21 address the third topic and also further define who is an eligible employee, the inability to exclude categories of employees, the impacts of part-time employment and the calculation of wages.
Questions 22 through 34 address the fourth topic and provide more detailed guidance on how employers can calculate the credit in various situations, such as when leave is paid by a third party or the employer is part of a controlled group of corporations.
Finally, the Notice states that it is effective beginning on September 28, 2018 for all wages paid for 2018 and 2019.
Many of the questions provide useful examples to help explain the IRS’ position. Employers should carefully review the Notice to determine whether, if it has such a plan in place and desires to use the Credit, it is compliant, and if not, whether to do so. The Notice further states that it is proposing guidance for proposed regulations. Public comments on the Notice may be submitted until November 23, 2018.