With an increasingly competitive talent market and changing employee demographics, employers are taking a closer look at their total benefits packages to understand what is driving prospective employees’ wants and needs, particularly relating to parental leave. State and local laws are also changing quickly, creating a regulatory maze that can be difficult to navigate. Milliman conducted a What’s Trending benefits pulse survey specific to parental leave benefits to get a sense of what employers are currently doing and considering in this space.
Parental leave benefits: Results
The results of a 2019 Milliman pulse survey confirmed that many employers are experiencing the issues of complex compliance as a result of changing laws and a competitive talent market demanding more robust leave benefits. Despite these pressures, there was little change in action from 2018 to 2019. Similar proportions of employers to those shown in Figure 1 are considering changes in 2020. Both parental leave benefits that are available regardless of employee gender or birth parent status and paid parental leave separate from vacation/sick time are popular for a significant minority among responding organizations.
For those who responded, the number of weeks of available leave increased for both birth and non-birth parents from 2018 to 2019 for the 6-11 weeks and 12+ weeks categories. Yet the percentage of pay decreased slightly.
Family leave benefits
More employers are considering paid family leave benefits in 2020 that are separate from, and in addition to, paid time off (PTO) or vacation/sick time, and above and beyond the care for newborns/newly adopted children. While only 9% of respondents in 2019 (5% in 2018) said they currently offer this benefit, 23% of respondents said they were considering offering it for 2020. Similar to parental leave, the number of weeks offered is trending up while the percentage of pay is trending down.
With competitive and regulatory pressures on employers to shore up parental leave programs, relatively few are taking definitive action. Of those that are, mitigating the potentially significant cost increases by lowering the percentage of pay while increasing the number of weeks of leave is a common strategy. As state and local laws continue to evolve, employers will need to pay special attention in order to ensure compliance.
Buried within the new amendment to the tax code, the Tax Cuts and Jobs Act, is a provision to allow employers to take a tax credit for providing paid family and medical leave for their employees. The United States is the only developed nation that does not offer paid leave for employees to care for family members. This new provision is a small step to try to fill that gap.
Starting in 2018, employers can now take an additional tax credit for part of the wages that are paid to employees taking qualified leaves. However, the provision is currently set to terminate at the end of 2019, which may make some employers think twice about whether this is the right time to begin offering paid leave. This article will lay out the provisions of the new credit and provide thoughts on how employers can offer this benefit to their employees. Milliman does not provide tax advice, and the commentary provided in this article should not be construed as such. Companies are encouraged to seek tax or legal counsel before pursuing any particular tax strategy.
Who is covered?
An employer is eligible for a tax credit for eligible paid family and medical leave benefits paid to an employee who has been employed by the employer for one year or more and who earned less than 60% of the “highly compensated employee” limit under § 414(q)(1)(B) in the prior year. That means, for 2018, this credit will only apply to employees who made less than $72,000 in 2017. That doesn’t mean that an employer should exclude its higher-paid employees from this benefit, just that the benefits paid to higher-paid employees will not be eligible for the tax credit.
What types of leaves are covered?
In order to receive this tax credit, the program must cover the same types of leaves as those covered under the Family and Medical Leave Act of 1993. These leaves may be taken for the following reasons:
• Birth of a child
• Adoption or fostering of a child
• To care for a spouse, child, or parent with a serious health condition
• The employee’s own serious health condition
• A qualifying exigency arising out of the fact that a spouse, child, or parent is on (or called to be on) active duty in the armed forces
• To care for a member of the armed forces or a veteran (with service in the past five years) with a serious injury or illness who is the employee’s spouse, child, parent, or next of kin
However, if the leave is provided as vacation leave, personal leave, or medical or sick leave (other than for one of the reasons above), then the leave does not qualify for the paid family and medical leave tax credit.
What amount of benefit needs to be provided?
A benefit amount between 50% and 100% of wages must be provided for at least two weeks in order for the employer to receive the tax credit. The tax credit is only available on the first 12 weeks of benefit paid in a year. Appropriate
adjustments are made for part-time employees.
How to determine the amount of the credit?
The amount of the paid family and medical leave tax credit is a sliding scale that increases from 12.5% to 25% of the amount of benefits paid to qualifying employees. The amount varies based on the percentage of the wages that are being replaced. The applicable percentage used to determine the tax credit is 12.5% increased by 0.25% for each percentage point that the rate of payment exceeds 50%. The table in Figure 1 is an example of how the tax credit works for an employee earning $1,000 per week and various options for the percentage of wages being replaced while on leave.
Does this credit apply to employers in states that mandate paid family leave already?
This tax credit doesn’t apply to state-mandated leaves. The regulation says that any leave that is paid by a state or local government or mandated by a state or local government shall not be taken into account when determining the amount of paid family and medical leave provided by the employer. Currently California, New Jersey, New York, and Rhode Island have mandated paid family and medical leave programs in place. In addition, Massachusetts, Washington, and Washington D.C. have passed leave legislations and will have mandated programs in place in the next few years.
Considerations in deciding to offer a paid family and medical leave program
If an employer decides to begin offering paid family and medical leave to its employees, it has a few decisions to make. The first decision is whether to insure the plan with an insurance company or to self-insure the benefit. If it decides to self-insure, it then will also need to decide if it wants to administer the plan on its own or if it wants to use a third party administrator (TPA).
The decision of whether to insure or not depends on the employer’s risk tolerance and cash flow availability. Taking into account the employee demographics, an estimate of expected claims costs and expenses can help an employer make the right decision for itself.
Milliman has assisted numerous clients in evaluating whether or not to adopt a paid family and medical leave program for their employees. Claims costs, expenses, and other risk considerations are all important items to review before implementing a new program. The interaction of the new plan with an existing leave program is often an important consideration as well. For example, the way that employees transition from a short-term disability maternity claim to a new child family leave should be carefully thought through from both the employee and the employer perspectives. In our experience, it is not only the cost of the program but also the employee’s experience, which are both important considerations.
Lobbyists and lawmakers across four states—Hawaii, Massachusetts, Connecticut, and Colorado—are considering paid family leave bills, with Connecticut’s legislation awaiting only a floor vote. If passed, the state would join California, New Jersey, Rhode Island, and New York in offering paid family leave benefits to its workers; Washington state and the District of Columbia will begin offering benefits in 2020.
Of those that offer benefits, the details of each paid family leave program vary from state to state. This infographic summarizes paid family leave requirements that employers must consider when adding these benefits to their health and welfare programs. To learn more, read Marcella Giorgou’s article “Paid family leave gaining traction in the United States.”
Beginning January 1, 2018, New York joined three other states to offer paid family leave in the United States. California, New Jersey, Rhode Island, and now New York all offer paid family leave programs funded through employee contributions. Washington state will begin offering paid family leave in 2020, funded through a combination of employer and employee contributions. Washington, D.C., will begin offering paid family leave in 2020 through employer contributions.
As more states implement paid family leave programs and the federal government continues to discuss it, paid family leave benefits as part of health and welfare programs have gained traction. Almost 60% of U.S. employers offer or are planning to offer paid leave in 2018 for new parents, and just under 50% offer or are planning to offer paid leave in 2018 to care for a sick family member.
Details of paid family leave programs vary from state to state. Employers with employees in multiple states need to navigate these different requirements in designing their programs. A summary of paid family leave requirements by state is shown in Figure 1.
In addition to the difference in benefits summarized above, details such as eligibility, waiting periods, and qualifying events, as well as how the benefits are delivered, differ from state to state. Most states provide the benefits through a state fund, although some allow for private insurers to participate in paid family leave, such as New York and New Jersey. New York also allows employers to self-insure their benefits.
As governments and employers (where self-insuring is an option) consider the cost of paid family leave programs, it is important for them to consider the following:
There is limited data available with regard to utilization of paid family leave benefits.
Although there is experience with respect to other paid family leave programs offered in states such as New Jersey it is important to adjust for differences in design and demographics of individual groups.
It is also important to consider disability claims related to maternity, as bonding with a newborn is generally where a majority of employees utilize paid family leave benefits. In New Jersey, approximately 85% of claims are for bonding with newborn children.
There will be administrative costs associated with the program.
Employers who self-insure in New York are required to hold a minimum security deposit to fund unexpected losses, which is determined at the employer level using assumptions prescribed by the New York Department of Financial Services (DFS). Also, the employers are required to submit their experience with DFS on an annual basis.
Some states and employers have taken the lead in implementing paid family leave programs in 2018. As others consider implementing paid family leave it is not only important to consider the cost of the program, but also the design, delivery, and funding. All of them are important to an employer’s leave management strategy.
President Donald Trump’s 2018 budget proposal includes a paid family leave insurance program for workers in the United States. Under the president’s proposal, states would be allowed to design the paid leave program for their own jurisdictions as long as the benefits meet minimum standards. This means that some states may have a lot to consider when preparing for a new insurance program, such as funding methods, administration, and specific benefit design features. The article “Paid family leave in the United States” by Paul Correia offers some perspective.
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