IRS releases guidance on new paid family and medical leave tax credit

By Ali Master, CPA, Dallas; Alan Ellenby, J.D., Chicago; Annette King, CEBS, Tampa, Fla.; Christa Bierma, J.D., Washington; and Tim Parrish, J.D., Dallas

Editor: Michael Dell, CPA

On Sept. 24, 2018, the IRS published guidance on the employer credit for paid family and medical leave, which was created by the law known as the Tax Cuts and Jobs Act, P.L. 115-97, and codified as Sec. 45S of the Internal Revenue Code. Notice 2018-71 provides clarification on important issues, such as qualifying leave types, minimum eligibility requirements, and how to calculate the credit.

Credit overview

In general, Sec. 45S provides a tax credit to employers that voluntarily pay qualifying employees on leave for certain purposes recognized by the Family and Medical Leave Act of 1993 (FMLA), P.L. 103-3. A qualifying employee is one employed for at least one year and paid less than a certain amount. To be eligible, the employer must have a written policy that provides at least 50% of normal wages during at least two weeks of paid leave to all qualifying full-time employees and a prorated leave period to all qualifying part-time employees.

Employers that pay 50% of wages may claim a credit equal to 12.5% of those wages; the applicable credit percentage increases 0.25 percentage points for each percentage point above 50%. In a tax year, the employer may take into account up to 12 weeks of leave per employee. Leave available for non-FMLA purposes (such as vacation leave, personal leave, or other medical or sick leave) does not qualify for the credit.

Notice 2018-71

The guidance in Notice 2018-71 is presented in a question-and-answer (Q&A) format. In addition, the notice indicated that: (1) the credit will be claimed on Form 8994, which as of this writing had yet to be published, and (2) the IRS and Treasury intended to publish proposed regulations.

Transition rule (Q&A 6): In general, Sec. 45S requires that an eligible employer for purposes of claiming the credit must have in place a written policy meeting certain requirements. The notice provides transition relief for determining when an employer's written policy is considered to be in place. The written policy may be considered to be in place as of the policy's effective date, rather than a later adoption date, if the employer takes certain time-sensitive steps. First, the policy or amendment must have been adopted on or before Dec. 31, 2018. Second, the employer must bring its leave practices into compliance with the terms of the retroactive policy for the entire period covered by the policy. Third, the employer must make any retroactive leave payments by the last day of the tax year. Although the transition relief applies equally to new written leave policies and amendments to existing policies, it applies only to the employer's first tax year beginning after Dec. 31, 2017. The first example in Question 6 illustrates this transition rule:

Facts: Employer's tax year is the calendar year. Employee takes two weeks of unpaid family and medical leave beginning Jan. 15, 2018. Employer adopts a written policy that satisfies the requirements of Sec. 45S on Oct. 1, 2018, and chooses to make the policy effective retroactive to Jan. 1, 2018. At the time the policy is adopted, Employer pays Employee (at a rate of payment provided by the policy) for the two weeks of unpaid leave taken in January 2018.

Conclusion: Assuming all other requirements for the credit are met, Employer may claim the credit with respect to the family and medical leave paid to Employee for the leave taken in January 2018.

Short-term disability (Q&A 11): The notice permits paid leave provided under an employer's short-term disability program, whether self-insured by an employer or provided through a short-term disability insurance policy, to be characterized as family and medical leave under Sec. 45S if it otherwise meets the requirements to be family and medical leave under Sec. 45S.

Qualifying employees (Q&As 12, 13, and 14): The notice clarifies the definition of qualifying employee. The notice confirms that an employee must have earned no more than a certain amount during the preceding year ($72,000 in 2017). Employers whose fiscal years are not the calendar year may choose to use as the "preceding year" either the employer's immediately preceding fiscal year or the calendar year ending in the employer's immediately preceding fiscal year.

With regard to the one-year employment requirement, until further guidance is issued, an employer may use any reasonable method to determine whether an employee has been employed for one year or more. The notice states that it would be reasonable to use the method set forth in 29 C.F.R. Section 825.110(b) (FMLA regulations for determining 12 months of employment) but that requiring employees to have worked 12 consecutive months would not be considered a reasonable method.

The notice goes on to state that, although the FMLA requires an employee to work at least 1,250 hours of service to be an eligible employee under the FMLA, this requirement does not apply under Sec. 45S to a qualifying employee for purposes of the credit.

Policy cannot exclude any qualifying employees (Q&A 15): The notice clarifies that the policy may not exclude any classification of employees, including collectively bargained employees, if they are qualifying employees. The examples under Q&A 15 further clarify that a policy that excludes leave for a preexisting condition effectively excludes a classification of employees.

Part-time employees (Q&A 17): Sec. 45S uses the definition of part-time employee set forth in Sec. 4980E(d)(4)(B) (an employee customarily working less than 30 hours per week). Until further guidance is issued, the notice allows employers to use any reasonable method to determine how many hours an employee customarily works per week for the employer. The notice specifies that the method set forth in 29 C.F.R. Section 2530.200b-2 (Department of Labor regulations for calculating hours of service for certain employee benefit plans) is a reasonable method.

Wages normally paid to an employee (Q&As 19 and 32): The notice states that overtime (other than regularly scheduled overtime) and discretionary bonuses are excluded from wages normally paid. For employees not paid as salaried or hourly, pending further guidance, an employer must determine wages normally paid using regulations under the Fair Labor Standards Act of 1938, P.L. 75-718, as amended, for determining the regular rate of pay (29 C.F.R. §778.109).

No uniform leave requirement (Q&A 20): The notice allows employers to vary the amount of paid leave provided for various FMLA purposes. Employers may provide more weeks of paid leave to certain classifications of qualifying employees as long as the minimum paid leave requirements are satisfied for all qualifying employees. For example, an employer may provide six weeks of annual paid leave for the birth or adoption of the employee's child at a rate of 100% of normal wages while providing only two weeks of annual paid leave at a rate of 75% of normal wages for other qualifying family or medical leave. Additionally, an employer that provides qualifying employees with 10 years of service an additional two weeks of annual paid family and medical leave may claim a credit for the additional two weeks as long as all other requirements are also satisfied. In addition, an employer need not provide paid leave for all permissible leave types, but it must meet the minimum requirements for any type of paid leave for which the employer seeks a credit.

Leave paid by a state or local government or required by state or local law (Q&A 21)The notice states that an employer must independently satisfy the minimum paid leave requirements, including providing a rate of payment of at least 50% of normal wages without considering any of the amount paid as required by state or local law. An example sets out facts in which, under state law, an employee on family and medical leave concurrently receives (1) six weeks of benefits paid by a state insurance fund at a rate of 50% of the employee's normal wages, plus (2) six weeks of annual paid family and medical leave paid under the employer's written policy at a payment rate of 30% of normal wages. Thus, the employee receives six weeks of annual paid family and medical leave at a rate of 80% of normal wages. The notice states that the employer's policy does not independently satisfy the requirement to pay at least 50% of normal wages, and therefore the wages paid under the employer's policy are not eligible for the credit.

501(c)(3) employers (Q&A 24): The notice clarifies that Sec. 501(c)(3) employers are not eligible for the credit, even if they have unrelated business income tax liability, because compensation paid by these employers does not constitute Federal Unemployment Tax Act wages within the meaning of Sec. 3306(b).

Controlled groups and groups of businesses under common control (Q&As 33 and 34): The notice clarifies that each member of a controlled group of corporations and each member of a group of businesses under common control may separately elect to claim or not claim the credit. Therefore, under Notice 2018-71, a single entity could elect not to provide paid family and medical leave to any or all of its employees, and that decision would not negatively affect eligibility for the credit of another entity within the same controlled group or group of businesses under common control that provides paid family and medical leave satisfying the minimum requirements of Sec. 45S.


In general, to be eligible for the credit, an employer must have a written policy in place that offers an annual minimum of two weeks' paid family and medical leave at 50% or more of normal wages to all qualifying full-time employees and a prorated amount to all qualifying part-time employees. A qualifying employee is one who has been employed for at least one year and was paid no more than $72,000 for the preceding year. The notice clarifies that the paid family and medical leave policy must cover all qualifying employees for the employer to be eligible, although the policy need not be contained in a single document covering all aspects of the overall policy and benefits.

The notice provides good news and bad news for employers that were exploring the adoption or modification of a paid leave program designed to qualify for this credit. On the positive side, the notice provides transition relief to allow employers to make retroactive changes to existing paid leave programs to bring them into compliance with Sec. 45S requirements or retroactively adopt a new written paid family or medical leave policy. The notice also provides welcome flexibility by permitting individual legal entities of a controlled group to opt out of the credit so that a failure to offer paid family and medical leave to employees in one entity does not negatively impact the eligibility of another entity in the controlled group. The clarification that short-term disability paid under an insurance policy may be characterized as family and medical leave under Sec. 45S is also helpful.

However, the notice confirms some of the concerns that employers had over the ability to implement a policy that complies with all of the requirements of Sec. 45S. For example, employers hoped that the IRS might announce a carve-out for union employees. However, the notice did not provide any relief in that area. This means that an employer entity with union employees will likely have to bargain over providing this paid leave to those employees before it can adopt a written policy that satisfies the Sec. 45S requirement of covering all employees.

Another major impediment is the lack of a carve-out for payments that employers must make under governmentally required leave policies. With so many jurisdictions mandating such payments, most employers have been reluctant to provide sufficient additional benefits to meet the Sec. 45S minimum requirements. Lastly, the notice does not address whether the use of full-time determinations under Sec. 4980H would be a reasonable method of determining whether an employee is customarily employed at least 30 hours per week.


Michael Dell is a partner at Ernst & Young LLP in Washington.

For additional information about these items, contact Mr. Dell at 202-327-8788 or

Unless otherwise noted, contributors are members of or associated with Ernst & Young LLP. Ernst & Young previously published versions of these items as Tax Alerts.

Tax Insider Articles


Business meal deductions after the TCJA

This article discusses the history of the deduction of business meal expenses and the new rules under the TCJA and the regulations and provides a framework for documenting and substantiating the deduction.


Quirks spurred by COVID-19 tax relief

This article discusses some procedural and administrative quirks that have emerged with the new tax legislative, regulatory, and procedural guidance related to COVID-19.