The Skinny
In our prior post, we outlined the section 45S paid leave tax credit and how employers can take advantage of it. IRS just dropped Notice 2018-71, which provides some clarity, but the clarity also added more technical requirements necessary to take advantage of the tax credit.
Good news: For 2018 only, employers can retroactively amend their leave policies to match the technical requirements of Code section 45S.
Bad news: For 2019, the policy changes must be in place before the leave is taken.
That means employers must amend their leave policies by December 31, 2018, in order to properly claim the tax credit for both 2018 and 2019.
The Dets
Short-Term Disability and PTO Taken for FMLA Purposes
So let's say that in 2018 you've provided your employees with loads of paid leave and disability benefits. Soon your finance department will be trying to figure out how to claim a tax credit for all this company-paid leave, and because you're in HR and handle leave matters, the finance folks will assume you're an expert on the paid leave tax credit. (Don't worry. We're here to help you be the hero that the finance folks want you to be.)
Code section 45S wasn't very clear about what to do with disability or PTO leave that someone takes for a FMLA-qualifying purpose. The statute is ambiguous, and prior IRS guidance just regurgitated the statute. IRS Notice 2018-71 resolved the ambiguity: Not only must the leave be taken for a FMLA-qualifying purpose, the leave policy must specifically be for FMLA-qualifying purposes and nothing else.
The Notice added a number of other technical requirements, but IRS threw employers a bone. Current leave policies can be amended retroactively to conform to the technical requirements of Code section 45S, so long as the amendment is adopted by December 31, 2018. In other words, without requiring that employers have actually designated leave taken in 2018 as FMLA leave, they can retroactively re-characterize that leave as FMLA leave (so long as there's a reasonable basis for doing so) and claim the tax credit—just this once. Starting January 1, 2019, the leave policies must conform to Code section 45S before the leave is taken in order to claim the tax credit.
Once more for folks in the back: just for 2018, employers can re-characterize leave taken under a PTO policy or short-term disability (STD) program as leave qualifying for the tax credit so long as (1) the leave was actually taken for a FMLA-qualifying purpose, and (2) the employer's FMLA and other leave policies are retroactively amended to conform to Code section 45S.
Necessary Amendments Are Hyper-Technical
How do leave policies need to be conformed to Code section 45S, you ask? Like an amendment to your retirement or welfare plan, amending your leave policies to conform to Code section 45S will require careful review. In general, though, pay attention to these details:
Make sure your leave policies provide at least a proportionate amount of leave to part-time employees, even if you don't currently have any. See our prior post.
Ensure that your FMLA leave policy, disability benefits and vacation/PTO policy work together in just the right way so that the correct policy trumps at the right time for the right kinds of leave.
The tax credit can be taken for both self-insured and insured STD benefits, and just like PTO policies, the STD benefits must fit just right into the FMLA leave policy. Under Code section 45S, state-mandated STD benefits won't count, so be sure to exclude them.
Non-Calendar-Year Taxpayers
Though a company may not have a calendar tax year—i.e., a fiscal tax year, the last day to adopt any retroactive amendments to your leave policies is still December 31, 2018. So if you fiscal tax year is July 1 to June 30, you must still act by December 31, 2018.
We're Here to Help
We could only just scratch the surface in this blog post, so if you have questions just ping us on the blue in-app messenger or give us a call.