Information contained in this publication is intended for informational purposes only and does not constitute legal advice or opinion, nor is it a substitute for the professional judgment of an attorney.
Buried in the massive Tax Cuts and Jobs Act (H.R. 1), the tax overhaul legislation the Senate approved on December 2, 2017, is a section providing a tax credit to employers that provide their employees with paid family and medical leave, and a separate section prohibiting deductions for the cost of sexual harassment settlements subject to nondisclosure agreements (NDAs) as a business expense. While it is uncertain if these provisions will survive the conference process to reconcile the Senate bill with the House-passed version, they are worth monitoring as Congress scrambles to send a final bill to the White House.
Paid Leave Tax Credit
Under the Senate's tax bill, eligible employers would be able to claim a general business credit equal to 12.5% of the wages paid to qualifying employees while they are on family and medical leave. To qualify for this tax credit, employers would have to provide their full-time employees with at least two weeks of paid family and medical leave (and provide their part-time employees with a proportional about of paid leave), and pay them at least half of their normal pay while they are on leave. This tax credit would increase, in increments, for each percentage point above the 50% threshold the employer agrees to pay employees on leave, up to a maximum tax credit of 25% of the wages paid if the employer pays 100% of the employees' wages while they are on family and medical leave. The credit could not be claimed for more than 12 weeks of leave per employee.
Leave paid for by a state or local government would not be taken into account in determining the amount of paid family and medical leave provided by the employer. In addition, employers would not be able to claim the tax credit for other paid leaves such as vacation leave, personal leave, or medical or sick leave unless that leave is taken for purposes permitted by the Family and Medical Leave Act (FMLA).
The tax credit would apply only to leave provided to employees who have worked for their employer for at least one year and are paid no more than or 60% of the tax code's compensation threshold for highly compensated employees, or $72,000 (60% of $120,000, the current threshold).
The new tax credit would apply to wages paid in taxable years beginning after December 31, 2017, and it appears to sunset after two years.
Senator Deb Fischer (R-NE) offered this section as an amendment (S. Amdt. 1793) to the tax legislation, and it was incorporated in the Senate-passed version as "SEC. 45S. Employer Credit For Paid Family And Medical Leave." She had introduced similar provisions as a standalone bill—the Strong Families Act (S. 344, S. 1716) —in February and August.
If this provision remains in the final tax legislation, it would be the first federal-level paid leave-related benefit affecting employers in the private sector signed into law.
Sexual Harassment Settlements
The increasing awareness of sexual harassment in the workplace also has found its way into the tax bill. Section 13307 of the bill would add the following to section 162 of the tax code:
PAYMENTS RELATED TO SEXUAL HARASSMENT AND SEXUAL ABUSE
No deduction shall be allowed under this chapter for-
(1) any settlement or payment related to sexual harassment or sexual abuse if such settlement or payment is subject to a nondisclosure agreement, or
(2) attorney's fees related to such a settlement or payment
In essence, an employer would be unable to deduct as a business expense the cost of the settlement of a sexual harassment claim (or the related attorneys’ fees), if the settlement has an NDA. If the provision is included in the final tax legislation, it would apply to amounts paid or costs incurred as part of a settlement after the date of the enactment.
Although Senate passage of the Tax Cuts and Jobs Act early Saturday morning was a significant legislative victory for congressional Republicans and the White House, the bill is not yet ready for the president's signature. Because the Senate bill differs from the version the House approved on November 16, the differences must be reconciled and voted on once again by both chambers. It is unclear whether these provisions will be retained or changed in the reconciliation process.
We will continue to monitor this legislation and report on any significant employment and benefits-related developments as it inches closer to enactment.