Officials at the Internal Revenue Service are starting to set upa major new employer tax credit program, for a new paid family and medical leave tax credit.

The Tax Cuts and Jobs Act of 2017 (TCJA) — Public Law115-97 — created the tax credit by adding Section 45S tothe Internal Revenue Code.

Related: 10 regulatory issues employers should watch thisfall

The IRC Section 45S tax credit will help an employer excludepart of the costs involved with providing paid family and medicalleave from taxable income.

The IRS talked about its 45S regulation-writing effortWednesday, in Notice 2018-71.

In a set of questions and answers included in the notice, IRSofficials make it clear that the new tax credit regulations couldhave a big effect on anyone involved with short-term disabilityinsurance or professional employer organizations (PEOs).

One possible change: The regulations could push manykinds of eligibility restrictions, including pre-existing conditionexclusions, out of group short-term disability plans.

How will 45S work?

The 45S tax credit is supposed to reimburse employersfor part of the cost of offering paid leave to full-time andpart-time employees.

Types of paid leave affected: Leavesfor purposes that make an employee eligible for leave under thefederal Family and Medical Leave Act of 1993 (FMLA).

Eligible employers: An employer is eligible ifit offers employees at least two weeks of paid FMLA leave per year,with the minimum level of eligible leave pay being 50% of theemployee's usual wages.

Amount of paid FMLA leave affected: An employercan get the tax credit for providing up to 12 weeks of paid FMLAleave for a qualifying employee per taxable year.

Employees who are eligible: A qualifyingemployee must have earned $72,000 or less from the employer in thepreceding year.

Size of tax credit: The credit canrange from 12.5% to 25% of the leave-period wages paid, dependingon the percentage of the employee's usual wages. The credit willamount to 6.25% to 12.5% of what the employee's usual wages wouldbe if the employee had collected full pay during the leave.

What's in the new IRS notice for insurance agents?

One thing that's clear is that an employer that wants to get thetax credit will need professional help with writing itsFMLA paid leave policy.

IRS officials describe many types of employer leave policiesthat would keep an employer from using the 45S tax credit.

IRS officials also answer many questions about how they thinkshort-term disability insurance plans and PEO arrangementswould interact with the 45S tax credit.

One of the questions is this: “May paid leave provided pursuantto an employer's short-term disability program be characterized asfamily and medical leave under section 45S?”

The IRS answer is: “Yes.”

“Paid leave provided under an employer's short-term disabilityprogram, whether self-insured by an employer or provided through ashort-term disability insurance, may be characterized as family andmedical leave under Section 45S if it otherwise meets therequirements to be family and medical leave under Section 45S,”officials say.

What could the 45S tax credit do to short-term disabilityinsurance plans?

The tax credit regulations could, possibly, push insurers, anddesigners of self-insured disability plans, to eliminate most ofthe current eligibility restrictions.

IRS officials talk about the effect of short-termdisability benefits restrictions on access to the 45S tax credit intheir answer to Question 15.

Officials note that employers can get the 45S tax credit only ifthey make 45S-qualified leave available to all employees, includingpart-time employees, new employees, and new employees who havepre-existing conditions, such as back problems or cancer.

Officials suggest that they might later write a regulation thatwould let an employer exclude certain employees with a very lownumber of hours.

But, for now, officials say, an employer that wants to get the45S tax credit must make paid FMLA leave available toevery employee who earned less than $72,000 in thepreceding year.

That means that, if an employer wants to use its fully insured,or self-insured, short-term disability plan benefits to meet the45S wage-continuation requirements, the short-termdisability plan must cover all employees who earned less than$72,000 in the preceding year, without any exceptions, officialssay.

If, for example, an employer hired an employee with a bad back,the employer used a short-term disability plan to meet its 45Spaid-leave obligations, and the employer's short-term disabilityplan excluded coverage for the back-pain-related disability for theemployee's first six months on the job, the IRS would see that as aproblem, officials say.

“The plan will not in all cases cover all qualifying employees,and employer may not claim the credit under Section 45S for paidfamily and medical leave provided under the written policy withrespect to any employees,” officials say.

What's in the new notice that might be of interest toPEOs?

In an answer to Question 25, IRS officials talk about how theythink the 45S tax credit would affect leave wages paid through aninsurer, a PEO, or a Certified Professional Employerorganization.

The eligible employer “for whom qualifying employees performservices” could collect the tax credit, but the PEO or otherthird-party payer could not, officials say.

An eligible employer would get the tax credit by filing IRS Form8994, “Employer Credit for Paid Family and Medical Leave,” and IRSForm 3800, “General Business Credit.”

The new tax filing requirements could create opportunities foragents who sell group short-term disability coverage or PEOservices to work with tax accountants.

What live IRS humans are working on the 45S tax creditregulations?

The IRS lists Dara Alderman as the principal author of Notice2018-71.

How can you shape the draft 45S tax creditregulations?

IRS officials note that they have not yet started the officialdrafting process.

Members of the public can still comments on what they think theupcoming draft regulations should look like. The comments are dueNov. 23.

Resources

A copy of IRS Notice 2018-71 is availablehere.

A set of IRS questions and answers about the 45S tax credit isavailable here.

Read more:

• Paid leave policies in thespotlight
• How to take advantage of new paid family, medicalleave tax credits
• Paid family, medical leave rising insupport