The Department of the Treasury and the Internal Revenue Service (IRS) recently issued guidance for employers on the credit for paid family and medical leave under Internal Revenue Code (IRC) Section 45S, as amended by the One, Big, Beautiful Bill Act (OBBBA). These agencies intend to publish proposed regulations concerning the guidance contained in their Notice 2026-28.
Congress added IRC Section 45S as a temporary provision in 2017 as part of the Tax Cuts and Jobs Act (TCJA). After two temporary extensions, the OBBBA amended Section 45S and made it permanent.
Overview of the Section 45S Employer Credit
Under Section 45S, employers receive the credit if they provide paid family and medical leave for employees. Wages that qualify for the credit include those subject to the Federal Unemployment Tax Act (FUTA). The OBBBA also provides an additional method for employers to calculate the credit. Employers can now determine the credit amount based on either the wages paid to qualifying employees on paid leave (the wage method) or, if the employer maintains an insurance policy to cover paid leave, based on insurance premiums paid (the premium method). The OBBBA also added a section stating that using the premium method doesn’t depend on whether any qualifying employees took paid leave during that year.
The OBBBA also amended the aggregation rule to treat all persons treated as a single employer under sections 414(b) and (c) as a single employer under this rule. An exception to the aggregation rule now also exists when a person has a “substantial and legitimate business reason for failing to provide a written policy that satisfies the requirements of Section 45S(c)(1) or (2).”
Next, the OBBBA modified Section 45S(c)(4) by requiring leave required or paid for by state or local law to be considered when determining the amount of paid family and medical leave the employer provides. This determination indicates whether the employer is eligible to claim the credit. However, this type of leave may not be considered when calculating the credit amount.
Furthermore, the OBBBA amended Section 280C(a) to clarify that employers cannot take a deduction for the portion of premiums owed in a year that equals the portion of the credit determined for the year under Section 45S(a)(1)(B).
The Premium Method
Using the premium method, eligibility for the credit, and the amount of the credit, are based on whether the premium paid funds a benefit for which the credit would be available under the wage method, i.e., creditable coverage. However, if any portion of the premium funds leave that would be ineligible for the credit under the wage method, that portion of the premium is also ineligible for the credit under the premium method. Additionally, employers may not deduct that portion of the wages or salaries paid or incurred for the year equal to the sum of the credit for the taxable year.
Likewise, the credit is available only for providing paid family and medical leave to qualifying employees within the meaning of Section 45S(d). Therefore, the employee must be a qualifying employee when the premium is incurred or paid.
Premiums also must be paid or incurred for creditable coverage. If an employer pays a premium for coverage of leave required by state or local law, or paid for by state or local government, that premium, or a portion of that premium, is not paid or incurred for creditable coverage. Similarly, if the premium is paid or incurred for coverage providing a benefit that does not qualify as wages under Section 45S(g), it is not paid or incurred for creditable coverage.
Allocation of Qualifying Premiums
In some cases, an employer pays premiums for an insurance policy that provides both creditable and noncreditable coverage (blended premium). When this situation occurs, the employer must allocate the premium between creditable and noncreditable coverage using any reasonable method consistent with the policy terms, if supported by contemporaneous records. A method is reasonable if it includes objective criteria and the employer consistently applies it to all persons treated as a single employer under the aggregation rule.
Choosing Between the Premium and Wage Methods
An employer can claim the credit using the wage method for some eligible leave, and the premium method for other eligible leave. However, an employer cannot claim credits using both the wage and premium methods concerning a single leave event. Nonetheless, if the benefits paid by the employer during a single leave event are funded partially by the insurance policy premiums and partially by the employer’s general funds, the employer can claim the credit using the wage method for the portion of leave funded from its general funds. Likewise, the employer can claim the credit using the premium method for the portion of leave funded by the insurance policy premiums.
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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