Menu of Options to Enhance the 45S Employer Credit

The 45S Employer Credit for Paid Family and Medical Leave has the potential to greatly expand access to paid leave in the United States. Enacted in 2017 under the leadership of Sen. Deb Fischer (R-NE), the bipartisan 45S tax credit is the first-ever federal policy to support paid family and medical leave in the United States.

Surveys suggest that helping employers provide leave benefits is highly popular among Americans. According to a recent BPC report, over three-quarters (77%) of small business owners support financial incentives for small businesses that provide paid family leave benefits. A 2017 Pew Research Center survey found the vast majority of Americans would prefer to receive paid family and medical leave benefits from their employer rather than the government. Additionally, Pew found that “providing tax credits to any employer that provides paid leave” is the most popular paid leave policy solution, with 87% of Americans favoring it.

The following is a menu of options to enhance the 45S tax credit to increase take-up by employers and thereby expand employee access to paid family and medical leave.

Evaluation and Marketing

Increase awareness among small businesses. The U.S. Small Business Administration (SBA) could partner with the Departments of Treasury and Labor to market the 45S tax credit to small businesses to increase awareness. Marketing should focus on disseminating educational materials to employers of all sizes and workers as well as helping employers understand which employees are eligible for coverage and how to request reimbursement from the IRS.

Commission a study on the tax credit’s impact. Congress should authorize funds for SBA, Government Accountability Office, Department of Labor, or another government research agency to analyze the impact of the tax credit on businesses, workers, and families. Such an analysis would greatly assist policymakers as they continue to improve the law’s effectiveness.

Core Enhancements and Expansions

Make the tax credit permanent. The tax credit was initially enacted as a two-year pilot program, received a one-year extension, and then was subsequently authorized through 2025. The continuing uncertainty about the tax credit’s future may make businesses less likely to use it to introduce or expand paid leave benefits. Employers need to be confident that they will not have to scale back or eliminate the benefit should the tax credit expire.

Increase the tax credit. Currently, the tax credit ranges from 12.5% to 25% of the cost of paid family and medical leave benefits, depending on the generosity of those benefits. To increase the incentive for employers, the credit could cover from 25% to 50% of benefit costs.

Increase the tax credit for small employers. Although the tax credit is offered to businesses of all sizes, larger businesses offer paid family and medical leave policies more often than smaller businesses. A larger credit for small employers – such as those with fewer than 50 employees – could incentivize them to utilize the credit more frequently.

Make the cost of obtaining temporary disability, parental leave, and/or family caregiving leave through private insurance eligible for the tax credit. Many employers obtain provide short-term disability benefits (a common form of paid personal medical leave) using private insurance products. Moreover, New Hampshire and Virginia recently enacted laws that will enable employers to obtain paid parental and family caregiving leave through private insurance. Allowing employers to apply the 45S tax credit toward the premiums and other costs associated with those insurance products would enable more employers to provide paid family and medical leave.

Make the cost of hiring temporary workers eligible for the tax credit. While many businesses – particularly small employers – want to provide paid leave, they struggle with the consequences of having an employee out for several weeks. Many incur costs to hire a temporary worker during the leave period or suffer lost productivity and growth opportunities. To help offset these impacts, lawmakers could expand eligible costs to include the wages of temp agency workers hired to replace employees who go on leave.

Increase the tax credit (proportionally) for employers offering longer leave (e.g., over six, eight, or 12 weeks, etc.). Some employers seek to provide more generous benefits than what they can afford when using the current tax credit. For instance, if an employer can only afford two weeks of leave even with the tax credit, then their employees may lack adequate leave and the employer may decide to not provide the benefit at all. A larger tax credit for longer paid leave benefits could help those employers provide more generous leave benefits and protect more employees.

Increase the tax credit for employers who provide more comprehensive paid family and medical leave benefits. Under its current design, employers are only required to provide at least one type of family and medical leave in order to claim the tax credit. Increasing the tax benefit for employers who provide a combination of paid parental, family caregiving, and personal medical leave could incentivize them to offer more comprehensive paid leave benefits.