Paid family and medical leave tax credit expands eligibility

The IRS has expanded guidance for the paid family and medical leave tax credit under §45S, creating new opportunities for employers that fund qualifying leave benefits through insurance. Notice 2026-28 implements changes made by last year’s One Big Beautiful Bill Act (OBBBA), which permanently extends the credit and introduces a new premium-based calculation method. As a result, some employers that previously were not eligible for the credit may now qualify.

Employers with insured paid family and medical leave benefits should review whether they now qualify for the credit and whether changes to their documentation or reporting procedures are needed.

How the expanded paid family and medical leave tax credit works

Before the 2025 act, employers generally calculated the paid family and medical leave tax credit using qualifying wages paid to employees during periods of family and medical leave.

Notice 2026-28 adds a second option. Eligible employers may now calculate the credit using qualifying insurance premiums paid to fund paid family and medical leave benefits.

Employers may use the wage method for certain leave and the premium method for other leave. However, they cannot claim both methods for the same portion of an instance of leave.

This expanded calculation method recognizes that many employers provide paid leave through insured benefit programs rather than paying benefits directly. For those employers, the change may create eligibility for a federal tax credit that was previously unavailable.

Which insurance premiums qualify for the credit?

The premium-based calculation does not apply to every insurance premium.

Only premiums attributable to qualifying paid family and medical leave benefits may be used to calculate the credit. Employers must exclude premiums related to nonqualifying employees, leave that is not qualifying paid family and medical leave under §45S(e), leave required by state or local law or paid for by a state or local government and benefits that are not treated as Federal Unemployment Tax Act (FUTA) wages.

Many insurance policies combine multiple types of coverage under one premium. When that occurs, employers must allocate the premium between qualifying and nonqualifying benefits.

The IRS does not require a specific allocation method. Instead, employers may use any reasonable method that is consistent with the policy terms, supported by contemporaneous records, based on objective criteria and applied consistently. Maintaining documentation that explains how premium amounts were allocated will be important if the calculation is reviewed by the IRS.

How tax professionals can help clients claim the expanded credit

Notice 2026-28 may create planning opportunities for business clients that have not previously claimed the paid family and medical leave tax credit.

Tax professionals should identify clients with insured paid leave programs and review their written leave policies, insurance arrangements and payroll records to determine whether they qualify under the expanded rules. Clients should also understand that only the portion of insurance premiums attributable to qualifying paid family and medical leave benefits is eligible for the credit.

Taxpayers may rely on Notice 2026-28 for taxable years beginning after Dec. 31, 2025, until proposed regulations are issued. The IRS is also requesting comments on premium allocation methods, voluntary state-facilitated paid leave programs and exceptions to the written policy requirement through Oct. 16, 2026.