August 18, 2026
The IRS has issued guidance on the newly expanded paid family and medical leave (PFML) tax credit. The One Big Beautiful Bill Act (OBBBA) made the credit permanent beginning in 2026 and expanded it in ways that could make it available to more employers. Notice 2026-28, released August 5, 2026, explains those changes, including expanded employee eligibility and a new way to calculate the credit. Proposed regulations are still forthcoming. To help clients, prospects, and others, Wilson Lewis has summarized the key details below.
The PFML credit (also known as Section 45S) helps eligible employers offset some of the cost of providing paid leave to employees. The credit starts at 12.5% when an employer pays 50% of an employee’s normal wages during qualifying leave. As the percentage of wages paid increases, so does the credit. For example, an employer that replaces 80% of an employee’s normal wages would receive a 20% credit on qualifying costs, and an employer that replaces 100% of an employee’s normal wages would receive the max credit of 25% on qualifying costs.
The credit applies to leave provided for certain family and medical reasons, such as welcoming a new child, dealing with an employee’s own serious health condition, or caring for a family member. Importantly, employers do not have to be covered by the Family and Medical Leave Act (FMLA) to claim the credit.
To qualify, employers must have a written policy that provides qualifying employees with at least two weeks of paid family and medical leave and replaces at least 50% of normal wages. Employers who are not covered by the FMLA must also include certain protections against interference and retaliation in written policies.
Notice 2026-28 highlights several important changes that employers of all sizes will want to know:
New Insurance-Based Calculation Method — Employers that purchase insurance to provide PFML benefits can now calculate the credit based on qualifying insurance premiums. Previously, the credit was based on wages actually paid while employees were on leave. Under the new provision, an employer may qualify for a credit on premiums even if no qualifying employee takes PFML during the year.
Expanded Employee Eligibility Rules — Employers can elect to reduce the minimum employment period from one year to six months, allowing more recently hired employees to qualify. Full-time and part-time employees can qualify, provided they customarily work at least 20 hours per week. Employees must also fall below the annual compensation limit, which is 60% of the highly compensated employee (HCE) threshold. For 2026, that means qualifying employees generally must have earned no more than $96,000 in the preceding year.
Interaction with State and Local Programs — Employers can now count leave required under state or local law toward the two-week minimum needed to qualify for the federal credit. Previously, this was not allowed. However, there is no double-dipping. Employers cannot claim the federal credit for leave benefits already required by state or local law. The credit applies only to qualifying benefits provided beyond those requirements or in jurisdictions where no mandate applies.
How Is the Credit Calculated?
Employers now have two ways to calculate the credit. The traditional wage method bases the credit only on qualifying wages paid while employees are taking leave. The new premium method instead allows employers to calculate the credit using the cost of qualifying insurance coverage, even if no eligible employee actually takes PFML leave during the year.
However, only the portion of the premium attributable to qualifying PFML coverage counts. An insurance policy might also cover other types of leave, employees who do not qualify for the credit, or benefits required under state or local law. In those cases, the employer will need to determine what portion of the premium relates to qualifying coverage.
Employers may also use both methods in the same year. They cannot, however, receive a wage-based credit and a premium-based credit for the same leave benefit.
What Should Employers Do Now?
Employers that already provide PFML should revisit the credit for 2026, even if they did not qualify or claim it in the past. The new premium method expanded employee eligibility rules, and treatment of state and local mandates could change the result. Employers with insured benefits should also review policies to determine whether some portion of the premium qualifies.
Employers that do not currently provide PFML may want to reconsider the cost of adding it. The credit can offset a portion of the cost, and the new premium method may make providing the benefit more realistic for smaller employers.
Contact Us
The PFML credit has been available for several years, but the 2026 changes create new opportunities for employers to use it. Employers are encouraged to review the expanded paid family and medical leave incentive to see how it may fit into future tax and benefits planning. If you have questions about the information outlined above or need assistance with another tax or accounting issue, Wilson Lewis can help. For additional information call 770-476-1004 or click here to contact us. We look forward to speaking with you soon.