We’ve had a paid FMLA tax credit for the last three years, and the large coronavirus law passed over Christmas week extended it another five years through December 31, 2025.  This credit under Internal Revenue Code Section 45S may have flown under many employers’ radar due to it initially being for just one year and then extended for just two years, but with a longer 5-year time horizon it may be worth a look.

This credit can reimburse employers up to 25% of paid FMLA wages and certain benefits, so while it can’t compare to the 100% tax credit for FFCRA paid leave wages and certain benefits or the 50% employee retention credit (ERC) for paid wages and certain benefits, those are very short-lived while this one seems to be holding its ground with Congress.

The purpose of this credit is to encourage employers to provide at least 50% pay for at least two weeks of FMLA taken per year.  Here’s the groundwork of how the credit under §45S works:

  • The employer must have a written paid FMLA policy.  Any FMLA paid prior to having a written policy are ineligible for the credit.
  • The minimum benefit must provide 50% pay for at least two weeks, even for part-time that qualify for FMLA.
    • The pay is allowed to be provided via a short-term disability program when the leave qualifies for both.
  • The policy must be solely for paid FMLA purposes, not for any other types of leave like minor illnesses or personal days.
    • However, there is one small exception: the policy is allowed to honor leaves to care for a family member not ordinarily covered under FMLA (such as a domestic partner, grandparent, or grandchild), so long as the employer doesn’t try to claim the tax credit for those leaves.
  • The written policy also must include a non-interference clause such as that provided in Q&A #3 of IRS Notice 2018-71, which says:
    • [Employer] will not interfere with, restrain, or deny the exercise of, or the attempt to exercise, any right provided under this policy. [Employer] will not discharge, or in any other manner discriminate against, any individual for opposing any practice prohibited by this policy.
  • Eligible employees are those subject to the Fair Labor Standards Act (FLSA) who earned no more than 60% of the highly compensated employee income limit the previous year (for example, during 2021 the credit can be claimed toward paid FMLA on employees that earned no more than $78,000 in 2020) and whose paid leave is not mandated or paid for by a state or local government.
    • The employer does not have to offer paid FMLA to employees not subject to the FLSA (such as ministers) or to employees that earned too much the previous year for the employer to receive a tax credit.  But we would anticipate employers wanting to include them for the paid FMLA even if the employer cannot claim those wages under the tax credit.
    • The employer can still claim the credit for wages paid after meeting a state or local government paid leave requirement.
      • For instance, the CO HFWA requires up to 48 hours of paid sick leave and up to 80 hours of public health emergency leave, but the employer could claim FMLA paid after those obligations are met.
      • But once the CO Paid Family and Medical Leave Program starts providing employees with up to 12 weeks of paid FMLA in 2024, FMLA paid by the government (or the employer) under that program will not qualify for this federal paid FMLA tax credit.
  • For an employer that reimburses the bare minimum (50% pay for at least 2 weeks), the credit reimburses the employer 12.5% of wages paid for FMLA.  The employer can increase this credit by 0.25% for every extra percent of pay, so paying a qualifying employee on FMLA 100% of their wages reimburses the employer with a 25% credit.
  • The credit can be claimed up to 12 weeks per taxable year.

Claiming the credit on these wages will make the employer unable to claim those wages for other purposes (no double tax benefit).  For example, they will no longer be ordinary deductible business expenses and cannot be claimed under the ERC.  But the purpose of this credit is to provide a better tax position than claiming those wages as ordinary deductible business expenses, so we recommend consulting with your tax counsel to determine whether and to what extent that might apply to your organization.  While the pandemic continues, employers are looking for ways to pay employees that need to take leaves of absence, and this could be a useful tool to help with some of those.

IMA will continue to monitor regulator guidance and offer meaningful, practical, timely information.

This material should not be considered as a substitute for legal, tax and/or actuarial advice. Contact the appropriate professional counsel for such matters. These materials are not exhaustive and are subject to possible changes in applicable laws, rules, and regulations and their interpretations.