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On August 5, 2026, the Treasury Department and the IRS (together, the “IRS”) released Notice 2026-28 – the first piece of guidance on the Code section 45S employer tax credit for paid family and medical leave (“PFML”) since the One, Big, Beautiful Bill Act (“OBBB”) made the tax credit permanent and expanded key provisions. (See our prior alert here.)
The Notice addresses a question employers have been asking since the OBBB amendments took effect: how to calculate the credit when an employer funds PFML through insurance premiums rather than paying PFML directly as wages. The short answer is that employers have considerable latitude, at least for now. The Notice requests comments on three discrete issues and the tax credit generally. Comments are due by October 16, 2026.
Background
Code section 45S was enacted as a temporary credit in the Tax Cuts and Jobs Act of 2017. The credit is equal to a percentage of wages paid to qualifying employees while they are on PFML (the same leave purposes as federal FMLA). The credit was intended to give employers greater incentives to provide PFML to their employees. However, many employers have not taken advantage of the credit because it originally had many restrictions. For example, employers with employees in states with mandatory PFML programs were unable to claim the credit, employees had to be employed for a full year to be qualifying employees, and the employer could not claim the credit for insurance premiums paid to fund PFML.
The OBBB made the credit permanent and removed several of these restrictions, such as:
- Expanded Eligibility: Employers can claim the credit for employees with six months of service and part-time employees customarily working 20 or more hours per week.
- Expanded Coverage: Employers can claim the credit for insurance premiums paid to fund PFML.
- State and Local Mandates: Employers can count leave provided under state or local mandates toward the eligibility for the tax credit but not toward the credit calculation itself.
Notice 2026-28
Premium Method
The Notice provides that an employer may claim the tax credit under the premium method only for the portions of the premium that would also be eligible for credit under the wage method for qualifying employees. No premiums paid or incurred for paid leave mandated by state and local law or paid for by a state or local government may be taken into account in calculating the credit amount.
Blended Premiums
The Notice addresses the common situation where an employer pays a “blended” premium, which means a premium for an insurance policy that funds a benefit for which the tax credit would be available (creditable coverage) and a benefit for which the tax credit would not be available (non-creditable coverage). For example, an employer pays a single premium for a STD policy that covers both qualifying employees and non-qualifying employees. The Notice allows employers to use “any reasonable method that is consistent with the policy terms and supported by contemporaneous records” to allocate the premium between the creditable coverage and non-creditable coverage. To be reasonable, the method must include objective criteria and consistently be applied for the tax year and to all employers treated as a single employer under the aggregation rules.
GROOM INSIGHT: The Notice does not provide many specifics regarding the premium allocation mechanics, but future regulations or other guidance may impose more requirements. Until further guidance is issued, employers have flexibility in determining how to allocate premium amounts for tax credit purposes. Employers should document their methodology and apply it consistently throughout the tax year and across all employers in their controlled group under the Code section 414(b) and (c) rules.
Premium and Wage Methods Combined
The Notice allows employers to claim the credit using both the premium and wage methods, provided that the methods are not both claimed “as to a particular instance of leave.” Where PFML benefits are partially funded by insurance premiums and partially funded by wages, the employer may claim the premium credit and the wage credit for the respective portion.
GROOM INSIGHT: This flexibility is welcome news to employers. Commenters previously requested that the IRS allow this. Many employers fund PFML through a combination of insurance and general assets (e.g., pays premiums on an STD policy that covers 60% of an employee’s PFML and pays 40% from its general assets as wages). Combined with the ability to use “any reasonable method” for blended premiums, this flexibility should allow employers to claim the full credit to which they may be entitled, rather than choosing between funding structures for tax reasons.
Reliance
The Notice states that forthcoming proposed regulations will be consistent with the Notice and that any changes will apply prospectively to wages and insurance premiums paid after the IRS releases final regulations. Until then, employers may rely on the guidance in the Notice.
Comments
The IRS specifically requests comments on three topics:
- the factors that an employer may use to allocate a blended premium and how employers may substantiate those allocations;
- the application of Code sections 45S(a)(1)(B) (the premium rule) and 45S(c)(4) (the state/local government mandated leave rule) to premiums paid for PFML through a voluntary state-facilitated program administered by a private insurance company; and
- what constitutes a “substantial and legitimate business reason” under Code section 45S(c)(3) for failing to provide a proper written PFML policy to employees.
The IRS also invites comments on all other aspects of the Notice and any other implementation issues under the OBBB amendments.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
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