Tax Insight

IRS guidance addresses expanded employer credit for paid family and medical leave

Insight
5 minute read
August 17, 2026

What happened?

Treasury and the IRS on August 5 issued Notice 2026-28, providing guidance on the Section 45S employer credit for paid family and medical leave (PFML) as amended under the One Big Beautiful Bill Act (the Act). Originally enacted as a temporary provision under 2017 tax reform (the 2017 Tax Act), Section 45S was made permanent by the Act and—for tax years beginning after December 31, 2025—enhances and expands eligibility for the credit.

The notice primarily focuses on guidance under the new premium-based method for calculating the credit, including how that method compares to the traditional wage-based method, how employers can allocate qualifying premiums, and how employers may elect between the premium method and the wage method. Treasury and the IRS also announced their intent to issue proposed regulations under Section 45S consistent with the guidance in the notice and that will address other issues and request comments.

Why is it relevant?

The Act significantly broadens the practical relevance of Section 45S. Notable changes include:

Employers now may elect to claim the credit for employees having at least six months of service (rather than one year).
Qualifying employees are now limited to those customarily employed for at least 20 hours per week.
Employers may elect to claim the credit for a tax year based on either (1) insurance premiums paid under a policy providing qualifying PFML benefits or (2) wages paid during qualifying PFML leave.
State or local mandated paid leave can count toward determining eligibility but still cannot be used to calculate the credit amount.
The Act also revises the aggregated group rule treatment generally and adds a potential exception for the written policy requirement.

Until now, Notice 2018-71 had been the only substantive guidance under Section 45S. Treasury and the IRS’s stated intention to issue proposed regulations—consistent with Notice 2026-28 and to address broader issues—is welcome news, particularly given the now-permanent and expanded credit. For employers that provide qualifying PFML, Section 45S may offer a mechanism to offset those costs in the form of a tax credit that could deliver a greater benefit than a tax deduction.

Actions to consider

Employers should assess whether their current PFML, short-term disability, parental leave, sick leave, and PTO programs satisfy the Section 45S written policy requirements and are specifically designated for one or more FMLA purposes. This evaluation should include accounting for employees’ state footprints when assessing eligibility. Eligible employers should model the wage method against the premium method to gauge the credit and its potential tax benefit. Currently ineligible employers should consider revising their written policy language.