Unlocking the value of paid leave: How the PFML Tax Credit can help employers support their people

Premium tax credit for PFML: What employers and brokers need to know

What changed?

The One Big Beautiful Bill Act (OBBB), signed on July 4, 2025, made the Section 45S tax credit permanent and meaningfully expanded it. Starting January 1, 2026, employers can now claim a tax credit for: 

• insurance premiums paid for group plans that cover FMLA-type leave, or 

• wages paid to employees during qualifying leave (for self-insured plans).

This credit for premiums applies even if no employees take leave during the year. 

Eligibility requirements

To qualify for the credit, an employer must have a written policy in place that:

• offers at least 2 weeks of paid leave annually to full-time employees (prorated for part-time) 

• pays at least 50% of normal wages during leave 

• covers employees who’ve worked at least 1 year and 20+ hours/week (optionally, those with 6+ months tenure).

The tax credit cannot be claimed for premiums paid for employees that earn over $96,000 (2025 threshold) annually (prorated for part-time employees).

State-mandated leave: What counts?

Previously, state-mandated paid leave couldn’t be used to meet eligibility. For example, to meet the two-week minimum requirement, a plan had to offer two weeks of paid leave in addition to any state-mandated benefits. Now, employers can count state or local leave mandates toward the minimum coverage requirement. However, the tax credit only applies to premiums paid for benefits that go beyond what the law requires.

What types of coverages qualify?

Eligible plans include: 

• Employer-paid group short-term disability (STD) 

• STD with paid leave riders 

• Stand-alone paid family leave (PFL or PFML) policies 

• Contributory STD plans (credit applies only to employer-paid portion) 

• Private plans for state PFML or disability (credit applies only to excess coverage beyond state mandates) 

How does the tax credit work?

Credit calculation:

• Starts at 12.5% of the premium for plans replacing 50% of wages 

• Increases by 0.25% for each 1% above 50%, up to 25% for 100% wage replacement 

• Most group plans replace 60% of wages, earning a 15% credit 

Example: Fully insured STD plan

• This credit directly reduces the employer’s tax liability.

 Deduction vs. tax credit comparison

• Employers must choose between a business deduction or the tax credit — they can’t claim both for the same premium amount. 

• In the example shown, the “Deduction and credit” scenario reflects a higher taxable income because the portion of the premium equal to the tax credit cannot be deducted. However, the tax credit directly reduces the final tax owed, resulting in a lower overall tax liability. This illustrates how, in some cases, the credit may be more financially advantageous than the deduction, depending on the employer’s tax situation.¹ 

Key takeaways for brokers and employers

• The Premium Tax Credit is a powerful tool to reduce tax liability while supporting paid employee leave. 

• It applies to fully insured and self-insured plans, with different rules. For self-insured plans, the Section 45S tax credit for wages paid during qualifying leave is subject to a maximum of 12 weeks per taxable year, as interpreted under current IRS and Treasury guidance.² 

• Employers must choose between claiming a business deduction or the Section 45S tax credit for the same premium amount — they cannot claim both. If an employer elects to take the tax credit, the amount of the credit must be subtracted from any business deduction they would otherwise claim for the premiums paid. State-mandated benefits count toward eligibility, but only excess coverage earns the credit. 

• Brokers can use this to illustrate how paid leave benefits can be both employee-friendly and, for some employers, offer potential cost savings via the tax credit. 

For additional information on the improvements to the Section 45S Paid Family and Medical Leave Tax Credit, please download our latest white paper.