The federal employer credit for paid family and medical leave was scheduled to expire after 2025. Congress instead made the credit permanent and substantially changed how employers may calculate it. For taxable years beginning after December 31, 2025, an eligible employer may continue to calculate the credit based on wages paid to employees while they are on qualifying leave, or elect a new method based on premiums paid for qualifying paid-family-and-medical-leave insurance.
Treasury and the IRS addressed the new premium method in Notice 2026-28, 2026-34 I.R.B. 177. The guidance provides employers with rules they may rely upon while Treasury prepares proposed regulations.
Two Ways to Calculate the Credit
Under the wage method, the credit is based on wages paid to qualifying employees while they are on family and medical leave. The credit begins at 12.5% when the employee receives 50% of the employee’s normal wages. It increases by 0.25 percentage points for each percentage point by which the wage-replacement rate exceeds 50%, reaching a maximum credit of 25% when the employee receives 100% of normal wages. No more than 12 weeks of leave per employee may be included in the calculation.
Under the new premium method, the same percentage is applied to qualifying premiums paid or incurred for a paid-family-and-medical-leave insurance policy. The replacement rate is determined from the insurance policy’s terms, even if no qualifying employee actually takes leave during the year. An employer that pays for qualifying coverage may therefore receive a credit in a year when the policy pays no claims. I.R.C. § 45S(a)(2), (3), (b)(3).
For example, assume an employer pays $20,000 in qualifying premiums for a policy that replaces 80% of normal wages. The applicable percentage is 20%, producing a preliminary credit of $4,000. The amount may be reduced if part of the premium covers employees, benefits, or leave that do not qualify under section 45S.
The section 45S credit is part of the general business credit. It reduces federal income tax subject to the ordinary general-business-credit limitations; it is not a refundable payroll-tax credit. The employer must also reduce its deduction for wages or insurance premiums by the amount of the corresponding credit under section 280C.
Not Every Insurance Premium Qualifies
The premium method generally follows the same eligibility rules as the wage method. A premium is creditable only to the extent it funds a benefit that would have qualified for the credit if the benefit had been paid directly as wages.
Notice 2026-28 excludes premium amounts attributable to:
- Leave that is not family and medical leave under section 45S;
- Individuals who are not qualifying employees;
- Leave required by state or local law or paid by a state or local government; and
- Benefits that would not constitute qualifying wages under section 45S(g).
An insurance policy may cover qualifying family and medical leave together with other benefits, such as broader disability coverage, general paid leave, or employees outside the section 45S eligibility rules. Notice 2026-28 calls this a “blended premium.” The employer must allocate the premium between creditable and noncreditable coverage using a reasonable method. The allocation must rely on objective criteria, conform to the insurance policy, be supported by contemporaneous records, and be applied consistently throughout the taxable year and across related employers subject to the aggregation rule.
Employers should obtain the necessary policy data from their insurance brokers before the tax return is prepared. A year-end estimate unsupported by policy terms, enrollment data, or other contemporaneous records may not satisfy the notice.
Employers May Use Both Methods, But Cannot Double Count
An employer may use the wage method for some leave and the premium method for other leave. The employer cannot claim both credits for the same funded benefit.
For example, if an insurance policy funds part of an employee’s leave benefit and the employer pays an additional amount from its general assets, the employer may claim the premium credit for the insured portion and the wage credit for the employer-funded portion. An employer that claims a credit for an insurance premium cannot later claim a wage credit for benefits reimbursed from that same policy.
The Written Policy Remains Essential
The new premium option does not eliminate section 45S’s written-policy requirements. An eligible employer generally must maintain a written policy that:
- Provides at least two weeks of annual paid family and medical leave to qualifying full-time employees, with a proportionate amount for qualifying part-time employees;
- Pays at least 50% of the employee’s normal wages; and
- Covers qualifying employees and, where applicable, includes the required noninterference protections.
The leave must be designated for Family and Medical Leave Act purposes, such as the birth or placement of a child, an employee’s serious health condition, care for a spouse, child, or parent with a serious health condition, or specified military-family needs. General vacation, personal, sick, or paid-time-off policies ordinarily do not qualify merely because an employee happens to use the leave for an FMLA-related reason. Notice 2018-71 continues to provide important guidance on these requirements except where superseded by the amended statute and Notice 2026-28.
The policy generally must be adopted and effective before the leave for which the credit is claimed. Employers cannot wait until return preparation to retroactively recharacterize ordinary paid leave as qualifying family and medical leave.
The Employee Eligibility Rules Also Changed
The new law permits an employer to elect a six-month service requirement instead of the prior one-year requirement. The election can make more recently hired employees eligible, but Congress also added a minimum-hours rule: a qualifying employee must customarily work at least 20 hours per week.
The compensation limitation remains. A qualifying employee’s compensation for the preceding year cannot exceed 60% of the highly compensated employee threshold under section 414(q)(1)(B), applying the statute’s annualization and part-time rules. For a calendar-year employer determining eligibility in 2026, the 2025 highly compensated employee threshold was $160,000, generally producing a $96,000 section 45S compensation ceiling. Fiscal-year employers and employers with part-time or recently hired employees must apply the more specific measurement rules.
The six-month election broadens the service rule, while the new 20-hours-per-week requirement excludes lower-hour employees who could have qualified under the former statute. Employers should update their eligibility census rather than simply carry forward their 2025 calculations.
State and Local Mandates Can Help Establish Eligibility
The amended statute also changes the treatment of leave required by state or local law or paid by a state or local government. Qualifying mandated leave may now be counted when determining whether the employer provides the minimum amount of paid family and medical leave required to be an eligible employer. The mandated or government-paid leave remains excluded from the credit calculation itself. I.R.C. § 45S(c)(4).
Employers operating in several states will need to separate three questions: whether a state-mandated benefit helps satisfy the federal policy requirement, whether the leave otherwise falls within section 45S’s definition of family and medical leave, and which wages or premiums remain eligible for the actual federal credit.
Related Employers Must Be Reviewed Together
The aggregation rule now generally treats businesses under common control within sections 414(b) and 414(c) as a single employer. A limited exception is available when an entity establishes a substantial and legitimate business reason for maintaining a different policy. The statute specifically provides that a separate line of business, different wage rates or job categories, or differing state and local leave laws are not sufficient by themselves.
Closely held businesses with several related companies should therefore review all leave policies together. A qualifying policy at one company may not cure a deficient policy elsewhere in the controlled group. Treasury has requested comments concerning the scope of the business-reason exception.
Employers Should Review Their 2026 Programs Now
The premium method may make section 45S considerably more useful, particularly for smaller employers that purchase short-term disability or paid-leave insurance but do not have employees taking qualifying leave every year. The credit remains document-driven. Employers should review the written leave policy, insurance contract, wage-replacement percentage, covered employee population, related entities, state-law benefits, and premium allocation before calculating the credit.
Taxpayers may rely on Notice 2026-28 for taxable years beginning after December 31, 2025, and before proposed regulations are issued. Treasury and the IRS have requested comments by October 16, 2026, including comments on blended-premium allocations, voluntary state-facilitated insurance programs, and the controlled-group exception.