By now, most people are generally aware of the recently passed Tax Cuts and Jobs Act (the Act); however, two lesser-known provisions of the Act will directly impact the workplace in 2018 by (1) eliminating the deductibility of sexual harassment settlements or payments that are subject to a nondisclosure agreement and related attorneys’ fees, and (2) providing a tax credit for certain paid family and medical leave.
Non-Deductibility of Payments Related to Sexual Harassment or Abuse Settlements
Section 13307 of the Act modifies Section 162 of the Internal Revenue Code by adding that “[n]o 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.” This provision became effective on December 22, 2017.
Given this change, employers settling sexual harassment and/or abuse claims may need to decide between a tax deduction or a confidentiality provision. In addition, the new statutory text leaves many unanswered questions, including the following:
- What if there are no allegations of discrimination or harassment, but as a condition to receiving severance in a reduction in force, an employee must sign a broad release that includes any possible sexual harassment claims; can the agreement include a non-disclosure provision without affecting the payment’s deductibility?
- What if the dispute involves discrimination or harassment allegations unrelated to sex, but the parties enter into a broad release that covers all possible claims, including any possible sexual harassment claim; can the agreement include a non-disclosure provision without affecting the payment’s deductibility?
- What if a confidential settlement covers multiple claims, only one of which relates to sexual harassment; can a portion of the settlement be allocated to sexual harassment and non-deductible, while preserving the deductibility of the remainder of the settlement payment?
- Is the bar on deducting attorneys’ fees limited to the time spent drafting the settlement, or to all fees incurred investigating and responding to the complaint?
- Until the IRS issues regulations or other guidance materials, employers and their counsel must wrestle with these unanswered questions.
Tax Credit for Certain Paid Family and Medical Leave
Another significant provision of the Act, Section 13403, amends Title 26 of the Internal Revenue Code and is the first step by the federal government to encourage employers to offer paid family and medical leave.
Under this Section, eligible employers can now claim a tax credit for wages paid to qualifying employees who are out on family and medical leave. To qualify for the tax credit, however, employers must have a written policy that:
- Offers their full-time employees at least two weeks of paid family and medical leave (up to a maximum of 12 weeks) and provides their part-time employees with a commensurate amount of paid leave, on a pro rata basis; and
- Pays their employees at least 50 percent of their normal wages while out on leave.
- The tax credit starts at 12.5 percent of the wages paid at the 50 percent rate and incrementally increases as the percentage of wages paid to employees increases, up to a maximum tax credit of 25 percent if the employer pays 100 percent of the employee’s normal wages while out on leave.
Notably, the tax credit only applies to leave provided to employees who have worked for the employer for at least one year and were paid no more than $72,000 in the preceding year.
If the employer is not already covered by the Family and Medical Leave Act, the written paid leave policy must include language stating that the employer “(i) will not interfere with, restrain, or deny the exercise of or the attempt to exercise, any rights provided under the policy, and (ii) will not discharge or in any other manner discriminate against any individual for opposing any practice prohibited by the policy.”
Finally, the Act provides that, “[i]f an employer provides paid leave as vacation leave, personal leave, or medical or sick leave (other than leave specifically for one or more of the purposes referred to [in the Family and Medical Leave Act], that paid leave shall not be considered family and medical leave under [this Section].” Although the language is not entirely clear, it appears that simply permitting employees to substitute other, existing paid leave for unpaid leave under Family and Medical Leave Act will not be enough to make the payments eligible for a tax credit, i.e., that the employer may need to provide new paid leave expressly for qualifying family and medical purposes to receive the tax credit.
Finally, Section 13403 is a pilot program, as the tax credit is set to expire on December 31, 2019.
Employers should consider whether to add or amend their Family and Medical Leave Act and other time-off policies in an effort to secure the foregoing tax credits.