IRS Guidance Expands Paid Family and Medical Leave (PFML) Tax Credit - HR ALERTS

IRS Guidance Expands Paid Family and Medical Leave (PFML) Tax Credit

Effective Date: August 5, 2026

Employers that provide paid family and medical leave may have a new opportunity to reduce the cost of providing these benefits.

On August 5, 2026, the IRS issued Notice 2026-28, providing new guidance on changes to the federal employer tax credit for paid family and medical leave under Internal Revenue Code Section 45S. The changes, enacted under the One Big Beautiful Bill Act (OBBBA), make the credit permanent and expand the ways eligible employers may calculate it.

What Changed?

Beginning in 2026, eligible employers may generally calculate the credit using one of two methods:

Wage Method: 

The existing method allows eligible employers to calculate the credit based on qualifying wages actually paid to employees while they are on family or medical leave.

Premium Method: 

Employers that purchase insurance providing qualifying paid family and medical leave benefits may now elect to calculate the credit based on qualifying insurance premiums paid or incurred during the year. Importantly, an employer may potentially qualify under this method even if no employees actually take paid family or medical leave during that year.

Employers may also use the wage method for some qualifying leave and the premium method for other qualifying leave, provided they do not claim both credits for the same leave benefit.

Who May Qualify?

The OBBBA also changed the definition of a qualifying employee. For purposes of the credit, qualifying employees must generally be customarily employed for at least 20 hours per week. Employers may also elect to include otherwise qualifying employees after six months of employment, rather than waiting one year.

There are additional requirements that determine whether an employer, its leave program, and particular wages or insurance premiums qualify for the credit.

What About State-Mandated Paid Leave?

The interaction with state and local paid leave programs can be complicated.

Leave required by state or local law, or paid by a state or local government, may now be considered when determining whether an employer provides sufficient paid leave to qualify as an eligible employer. However, amounts attributable to government-required or government-paid leave cannot themselves be used to calculate the federal credit.

What Should Employers Do?

Employers that provide paid family and medical leave should consider:

• Reviewing their current paid leave policies and eligibility requirements.

• Determining whether any employer-paid insurance policies provide qualifying paid family or medical leave benefits.

• Identifying premiums or wages that could potentially qualify for the Section 45S credit.

• Maintaining appropriate documentation, particularly when an insurance premium covers both qualifying and nonqualifying benefits.

• Consulting with their tax advisor to determine eligibility and evaluate which calculation method may provide the greatest benefit.

The IRS has indicated that additional proposed regulations are forthcoming. In the meantime, employers may rely on the guidance in Notice 2026-28 for taxable years beginning after December 31, 2025, and before the proposed regulations are issued.

The Bottom Line

Employers that already provide paid family and medical leave, or pay premiums for insurance providing these benefits, should not assume this credit does not apply to them. The expanded rules may create a valuable tax-saving opportunity beginning in 2026.

Vida HR provides this information for general educational purposes and does not provide tax advice. Employers should consult with their tax advisor regarding eligibility for and calculation of federal tax credits.

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