IRS releases guidance on the paid family and medical leave tax credit

Offering paid family and medical leave (PFML) can help businesses attract and retain employees while providing workers with financial support when they need time away to care for themselves or their families. The Section 45S PFML tax credit can help eligible employers offset some of the costs.

The One Big Beautiful Bill Act (OBBBA) made the credit permanent and expanded it beginning in 2026, potentially making it available to more employers. The IRS has issued Notice 2026-28 to provide guidance on the expanded credit. Employers that offer PFML should familiarize themselves with the new rules to determine whether they qualify and how best to take advantage of the credit. Employers that don’t currently provide PFML may want to consider whether doing so might now be more feasible because of the expanded credit.

What’s the PFML tax credit?

The PFML tax credit was created by the Tax Cuts and Jobs Act (TCJA) and is available to employers that provide qualifying employees with paid leave consistent with the Family and Medical Leave Act (FMLA), regardless of whether the FMLA applies to them. Under the TCJA, eligible employers can claim a general business credit for a portion of the actual cost of PFML wages that have been paid out, with the percentage depending on how PFML wages compare with the employee’s normal wages.

If PFML wages are 50% of normal wages, the credit is 12.5% of PFML wages paid. The rate climbs to 25% ratably as PFML wages increase from 50% of normal wages to 100%. The amount of PFML wages for which an employer can claim the credit is limited to 12 weeks per employee per year.

A qualifying employee is a full- or part-time employee who’s worked for the employer at least one year. The employee also can earn no more than 60% of the “highly compensated employee” limit (for 2026, no more than $96,000).

The credit is available only for leave taken after the employer has a written PFML policy in place. Among other things, the policy must provide at least two weeks of PFML annually (prorated for part-time employees), FMLA protections and a PFML rate of payment of at least 50% of normal wages. Under the TCJA, leave paid by a state or local government or required by state or local law wasn’t taken into account when determining whether an employer’s written policy includes a PFML rate of at least 50% of normal wages.

Notably, an employer must reduce its deduction for wages (or salaries) paid or incurred by the credit amount. Also, wages used to determine any other general business credit may not be used to calculate the PFML credit.

What are the changes under the OBBBA?

The OBBBA modifies the PFML credit in several critical ways. Here are some of the most important:

• Instead of calculating the credit based on actual PFML wages paid, an employer can opt to calculate the credit based on premiums paid or incurred for insurance policies that provide PFML for qualifying employees — regardless of whether any leave is actually taken in the tax year.
• Leave required by state or local law or paid for by state or local governments is taken into account when determining the amount of PFML the employer provided for purposes of determining eligibility for the credit but not when calculating the amount of the credit.
• Qualifying employees are limited to those customarily employed for at least 20 hours per week.
• Employers can elect to include employees after six months of employment.
• Employers can’t claim a deduction for the portion of premiums paid or incurred that’s equal to that portion of the PFML credit claimed.

The new guidance focuses on the OBBBA’s “premium method” (as opposed to the “wage method”) for determining the credit amount.

The premium method guidance

The guidance explains that an employer can claim the PFML credit only for a premium that funds a benefit for which a credit would be available under the wage method if the benefit were actually paid — what’s referred to as “creditable coverage.” If any portion of a premium funds leave that wouldn’t qualify for the credit under the wage method, that portion also isn’t eligible for the credit under the premium method.

The following types of coverage aren’t considered creditable:

• Coverage for leave that isn’t PFML,
• Coverage for leave that would be payable to a nonqualifying employee (evaluated at the time the premium is paid or incurred),
• Coverage for leave required by state or local law or paid for by a state or local government, and
• Coverage that provides a benefit other than wages.

The guidance also addresses the allocation of a premium for coverage that 1) provides both qualifying PFML and other types of leave, or 2) applies to both qualifying and nonqualifying employees. In such circumstances, an employer can use any “reasonable” allocation method that’s consistent with the policy terms and supported by contemporaneous records.

The IRS will allow an employer to use the wage method for some leave and the premium method for other leave. But the employer can’t use the wage method to claim the credit for wages paid if it also claims a credit using the premium method for coverage that funds such benefits (or vice versa).

Relying on the guidance

The IRS expects to issue proposed regulations that will mirror this guidance. These regulations will apply prospectively, but taxpayers can rely on the current guidance for tax years beginning after 2025 and before the proposed regulations are issued. If you have questions regarding the PFML credit, contact us.

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