Adviser: New Tax Law Provides Credit For Paid Employee Leave

Although promoting a healthy workforce is a top priority for businesses, most serious medical issues often pop up unexpectedly, leaving both the employee and employer in a tough spot. Many employers are covered by the Family and Medical Leave Act, which allows employees to take the time off needed to improve their health.

However, these medical issues — whether stemming from an employee or a family member — often impact more than just physical well-being.

While some employers voluntarily offer paid leave to their employees, it is not required by state law and can be costly to do so. On the flip side, this means extended time off from work for medical reasons can greatly reduce, or even eliminate, an employee's income during that period, which ultimately only adds to the hardship at hand.

The Tax Cut and Jobs Act, passed and signed into law by President Trump on Dec. 22, provides an incentive for employers to offer paid leave to their employees. Under a new provision — Section 45S — added to the TCJA's Internal Revenue Code, employers will receive a tax credit of up to 25% of an employee's compensation when offering paid family and medical leave.

Specifics of this new provision are as follows:

• The leave must qualify under the Family and Medical Leave Act.
• Paid leave must provide at least 50% of an employee's compensation for a minimum of two weeks, if not more and for a longer period.
• The tax credit ranges from 12.5% up to 25%, depending on the amount of compensation that is paid. Only employers that provide payment of full earnings receive the 25% credit. (Keep in mind, though, that the credit is only available for employees that earned up to $72,000 in 2017.)
• The paid leave program must be made available to both full-time and part-time employees who have been employed for at least one year.

Whether a company considers initiating a paid leave program or already has one in place, a clear policy will need to be carefully developed. Any existing paid leave programs that don't meet each of the above guidelines will not qualify for a tax credit under this new provision.

Further, an employer considering such a program may find that it has eligible employees already on leave, or planning to take leave soon. In these cases, the employer should develop and promptly implement a new policy that provides paid leave to receive the tax credit. In addition, because there are no regulations on point, it's important that employers keep thorough records to prove that they have complied with the new law.

Although there are some states that require paid leave, the concept of paid leave is not uniform under federal law.

This provision is only in place for 2018 and 2019 so far, but we can anticipate attempts to expand and make it permanent.

Employers that provide paid leave allow employees to take the much-needed time to address their medical issues and come back to work healthy and re-energized. Because most employers view their benefit plans as crucial recruitment and retention tools, we expect many employers will consider adding paid leave as an additional benefit over the coming year.

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