The economics of paid family and medical leave (PFML) may have changed significantly
Thanks to updates to Internal Revenue Code Section 45S, eligible employers may now be able to claim a federal tax credit based on qualifying insurance premiums, not just wages paid during leave. As a result, organizations may have new opportunities to evaluate how paid leave benefits fit into their overall workforce and benefits strategy.
The IRS recently issued Notice 2026-28, providing important clarification on how the new premium-based tax credit works and what employers should consider when evaluating potential eligibility.
Subscribe to the Guardian Absence Management blog
What changed?
Section 45S provides eligible employers with a federal business tax credit for qualifying paid family and medical leave. While the tax credit previously focused on wages paid to employees during leave, beginning in 2026, employers may be able to calculate the credit using qualifying insurance premiums.
This creates a potentially meaningful opportunity for employers that offer insured paid leave benefits, including certain short-term disability and paid leave programs.
Key clarifications from Notice 2026-28
The guidance addresses several important questions employers and advisors have been asking, including:
Employee eligibility requirements.
How the wage-based and premium-based methods can be used.
Which premiums may qualify for the credit.
How to allocate premiums when coverage includes both creditable and noncreditable benefits.
How state-mandated leave programs affect tax credit calculations.
The guidance also confirms that employers may rely on Notice 2026-28 while Treasury and the IRS work toward future regulations.
Why it matters
The premium-based method may create a tax credit opportunity even when no employee takes leave during the year. For employers evaluating leave, disability, and workforce support programs, that changes the conversation.
The new rules may also prompt organizations to review:
Existing paid leave strategies.
Short-term disability and paid leave program design.
Costs associated with self-funded versus insured approaches.
Documentation and compliance processes required to support a tax position.
However, determining eligibility isn't always straightforward. Employers must evaluate factors such as wage replacement levels, eligible employees, state leave mandates, employer-paid premium amounts, and premium allocation requirements.
A new reason to revisit leave strategy
As paid leave continues to evolve, employers are looking for ways to balance workforce support, compliance obligations, and benefit costs. The expanded Section 45S tax credit may provide an additional opportunity to evaluate how paid leave, disability coverage, and absence management work together to support employees while delivering value to the organization.
Learn more
Notice 2026-28 provides important clarification, but employers should work with their tax, legal, and benefits advisors to assess eligibility and determine the most appropriate approach for their organization.
Download the white paper
Download Guardian's white paper, “The PFML Tax Credit: What Notice 2026-28 Clarifies,” for a deeper look at eligibility requirements, premium allocation, calculation considerations, and practical examples.
Subscribe to the Absence Management Blog
Stay in the know with a quarterly round-up of the latest blog updates.
All fields are required unless marked optional.
