As businesses compete for talent and seek ways to support employees, paid family and medical leave (PFML) benefits continue to gain importance. Recent changes under the One Big Beautiful Bill Act (OBBBA) make the federal Paid Family and Medical Leave Tax Credit permanent and broaden eligibility beginning in 2026. To help employers understand these changes, the IRS has issued Notice 2026-28, providing guidance on how the expanded credit applies and how it can be calculated.

Employers that currently offer PFML should review the new rules to maximize available tax benefits and ensure compliance. Businesses that do not currently provide paid leave may find the expanded credit creates new opportunities to implement employee-friendly benefits while offsetting associated costs.

Understanding the Paid Family and Medical Leave Tax Credit

Originally established under the Tax Cuts and Jobs Act (TCJA), the Section 45S Paid Family and Medical Leave Tax Credit allows eligible employers to claim a federal business tax credit for qualifying paid leave provided to employees. The credit is available regardless of whether an employer is subject to the Family and Medical Leave Act (FMLA), provided certain requirements are met.

Under existing rules:

• Employers may claim a credit equal to 12.5% to 25% of qualifying PFML wages paid.
• The credit percentage increases as the employee’s leave pay approaches 100% of normal wages.
• Eligible wages are limited to up to 12 weeks of leave per employee each year.
• Covered employees must generally have at least one year of service.
• For 2026, qualifying employees may earn no more than $96,000 annually.

To qualify, employers must maintain a written PFML policy that:

• Provides at least two weeks of annual paid leave (prorated for part-time employees),
• Pays at least 50% of the employee’s normal wages during eligible leave periods,
• Includes protections consistent with FMLA requirements.

CPA Compliance Considerations

Employers should be aware that:

• A written PFML policy must be in place before leave is taken to qualify for the credit.
• Wages used to calculate the PFML credit cannot also be used to claim other federal business tax credits.
• Employers must reduce their wage deduction by the amount of the credit claimed.
• Proper documentation and recordkeeping are essential to support eligibility and credit calculations in the event of an IRS examination.

Key Changes Beginning in 2026

The OBBBA significantly expands the PFML credit and introduces greater flexibility for employers.

Notable changes include:

New Premium-Based Credit Calculation Option

Beginning in 2026, employers may elect to calculate the credit based on premiums paid for qualifying insurance policies that provide paid family and medical leave benefits. This option is available even if no employee actually takes leave during the tax year.

State-Mandated Leave Considerations

Leave benefits required by state or local law may now be considered when determining whether an employer qualifies for the credit. However, those benefits generally cannot be included when calculating the actual amount of the credit.

Expanded Employee Eligibility Rules

The new law:

• Limits qualifying employees to those customarily working at least 20 hours per week.
• Allows employers to elect eligibility after six months of employment rather than one year.

Deduction Limitations

Employers claiming the credit under the premium method may not deduct the portion of insurance premiums that corresponds to the tax credit received.

IRS Guidance on the Premium Method

IRS Notice 2026-28 primarily focuses on the new premium method and clarifies what types of insurance coverage qualify.

A premium is eligible for the credit only if it funds benefits that would qualify under the traditional wage-based method. The IRS refers to this as “creditable coverage.”

Coverage generally does not qualify if it relates to:

• Leave that is not family or medical leave,
• Employees who do not meet eligibility requirements,
• State- or locally mandated leave programs,
• Benefits that do not replace wages.

Employers offering policies that cover both qualifying and nonqualifying benefits must use a reasonable allocation method supported by contemporaneous documentation and policy records.

The IRS also allows employers to use both the wage method and premium method within the same tax year for different leave programs, provided the same benefits are not used to calculate the credit under both methods.

What Employers Should Do Now

With the PFML credit now permanent and expanded, employers should reassess their paid leave programs and determine whether they may qualify for enhanced tax savings beginning in 2026.

Key action items include:

• Review existing paid leave policies for compliance with Section 45S requirements.
• Evaluate whether the premium method may provide greater tax benefits.
• Verify employee eligibility criteria and payroll tracking procedures.
• Maintain written policies and supporting documentation.
• Coordinate with your CPA and tax advisor to ensure proper credit calculations and deduction adjustments.

Plan Ahead

The IRS intends to issue proposed regulations that are expected to mirror the guidance provided in Notice 2026-28. Until then, employers may rely on the current guidance for tax years beginning after December 31, 2025.

Because eligibility calculations, deduction limitations, and documentation requirements can be complex, employers should consult with a qualified CPA professional before claiming the credit. Careful planning can help maximize available tax benefits while maintaining compliance with federal tax law.