This post gets pretty deep in the weeds, but it’s an issue that was brought to my attention by someone who works on family and medical leave policy and I was shocked to discover that it may disqualify certain employers from claiming the temporary paid family and medical leave credit included in the CPA Full Employment Act of 2017.
I’ve written at length about that credit, which is set to expire at the end of 2019, so first pop over to my earlier post to get caught up on what it is and how to claim it.
Only benefits in excess of state requirements are eligible for the paid family and medical leave credit
The 8 states and the District of Columbia which have enacted paid family and medical leave typically administer it through the state’s existing temporary or short-term disability insurance program, through a separate state-run program, or through private insurers. Some states, like New York, also allow businesses to self-insure.
These insurance policies are funded either through employee contributions (as in New York State), employer contributions (like in the District of Columbia), or a combination of both (in Washington State).
This puts firms in states that require paid family and medical leave at a severe disadvantage, because the IRS has announced that “[a]ny leave paid by a State or local government or required by State or local law is not taken into account for any purpose in determining the amount of paid family and medical leave provided by the employer” — and this is true whether or not the leave is paid for by the employer!
This creates the absurd situation where virtually identical employers are treated completely differently by the federal tax code. An employer in Connecticut that provided 55% wage replacement for all their eligible employees in 2019 for all Family and Medical Leave Act purposes would receive a tax credit for 25% of the replaced wages; an identical employer in New York would receive nothing, simply because the benefit is required by state law.
In the specific case of New York, you might think this makes sense, since family and medical leave insurance premiums are, by default, paid for by employee payroll deductions; since the employer doesn’t pay anything, they aren’t entitled to a tax credit for the resulting benefit. But New York also allows employers to pay their employees’ insurance premiums (just like employers can pay for insurance in any other state), and even employers who pay in full for their employees’ leave are not entitled to the tax credit, unlike their competitors on the other side of the Long Island Sound.
If you squint just right at the rules around the tax credit, you can see the kind of broken-brained Congressional logic at work here: the tax credit is intended to encourage additional employers to provide paid family and medical leave. Firms which are already required by state or local law to provide paid leave by definition don’t need any additional encouragement.
But that logic has the deranged result I described above: two firms with identical payroll and identical paid family leave policies will face different federal tax rates based solely on whether their paid family leave policy is or is not required by state law.
In other words, a tax credit intended to encourage firms to adopt paid family leave policies has the perverse consequence that New York State could increase the amount of federal tax credits flowing to its businesses by repealing its paid family leave policy, which would immediately deny access to paid family leave for millions of New Yorkers.
Fortunately, the paid family and medical leave credit is currently set to expire at the end of 2019. For all our sakes, let’s hope we get it right next time.