If your Maine company initiates a new paid family and medical leave benefit, the Tax Cuts and Jobs Act, enacted at the end of last year, will give your company a tax credit. Although the IRS has yet to issue its interpretive regulations, the text of the law itself gives you enough to go on to at least consider whether doing so would be a worthwhile exercise.
Here’s a recap of the basics. First, the tax credit is available this year and next, but it could be extended beyond 2019 if Congress decides it’s working well. It primarily relies on leave eligibility criteria laid out by the Family and Medical Leave Act.
The size of the credit tops out at 25% of the wages paid to employees during their new family leave benefit. To qualify for that maximum credit, employees must be paid 100% of their wages during the leave period.
Employees must be paid at least 50% of their normal earnings for your company to get the minimum credit (12.5% of wages earned). The credit percentage inches up (toward the maximum of 25% credit) as the proportion of wages paid to the employee on leave increases.
More Nuts and Bolts
If you already have a paid time off program in place, this tax credit cannot be claimed, because it is for new programs only. Also, the minimum duration of the new family leave benefit is two weeks, and it must be offered both to full- and part-time employees who have been on board for a year or longer. You can’t take the credit against benefits paid to employees earning more than $72,000; a figure will be inflation-indexed in following years.
You’ll need to define the new benefit in writing for employees should you decide to take advantage of the tax credit. The description should then go in your employee handbook.
Should you take advantage of this program? People and organizations that have been advocating for paid family and medical leave for many years always marshal justifications for doing so based on concrete benefits to the employer. They assert that such policies improve employee productivity and make workers more loyal. No doubt in many instances that’s true but, of course, there’s no guaranteeing it that will happen at your company.
What Else Should You Consider?
Here’s some more food for thought:
- How much money are we really talking about? Let’s say you have 100 employees earning an average of $40,000. Your benefits call for full wage replacement, entitling you to the maximum 25% tax credit. And, over the course of a year, 25 employees use the new benefit, averaging two weeks each (the minimum leave to qualify for the credit). Based on those assumptions, the pre-tax added cost of the benefit would be around $38,462, and the 25% tax credit would reduce it on an after-tax basis to $28,847, if your company’s tax liability exceeds the credit amount.
- To what extent will you actually be able to use the tax credit? The answer depends not only upon how many employees take advantage of it, but also the size of your tax liability. The credits might not do you much good from a purely financial standpoint if you’re not anticipating much of a tax bill for 2018 and 2019.
- What if you were already giving serious consideration to providing a paid family and medical leave benefit without expecting a new financial incentive? The tax credit would be icing on the cake.
- What happens if you launch a paid family and medical leave benefit based on the prospect of its diminished after-tax cost but Congress doesn’t extend the program after 2019? At that point, you might find it difficult to pull the plug on this benefit.
- Even if you weren’t contemplating such a program, are you having challenges attracting and keeping new and old employees on board? The dollar cost might be well worth the possible boost it would give to your reputation as a good place to work, unless the benefit is abused of course.
- Do you have the administrative capacity to judge the merits of paid borderline family and medical absence requests? It’s possible that you’ll experience more leave requests once employees know they’ll be paid during that leave period than when they weren’t.
How much employees would value this benefit? You might want to poll your workers on their preference for some new benefit possibilities, not just paid family and medical leave.
For example, you might consider giving them a choice between paid family and medical leave and a larger match to their 401(k) contributions, using a match amount that would be similar in cost to a paid leave plan. Such a survey might reveal a strong employee preference for the higher 401(k) match. If so, those results could make the choice an easier one.
Although it’s true that not all tax incentives are the right fit for every company, this new tax credit for paid family and medical leave is certainly worth a look. In order to make an informed decision, ask Filler & Associates or your trusted financial advisor to run the numbers.