Employers that provide paid family and medical leave may have a new reason to take a close look at their leave programs.
The federal Employer Credit for Paid Family and Medical Leave, found in Internal Revenue Code Section 45S, is now permanent and has been expanded. New IRS guidance explains how employers may qualify for the credit beginning in 2026, including a new option that allows certain employers to calculate the credit based on insurance premiums rather than only wages paid to employees while they are on leave.
For employers, especially small and mid-size businesses, that makes this more than a tax-law footnote. It is a good time for HR, benefits professionals, payroll providers, and tax advisors to review how the organization provides paid leave and whether the employer may be leaving a federal tax credit on the table.
What Changed
Section 45S originally provided a temporary federal tax credit to eligible employers that voluntarily provided qualifying paid family and medical leave. Congress has now made the credit permanent and expanded it.
Beginning with taxable years after December 31, 2025, employers potentially have two ways to calculate the credit:
- The wage method. The credit is based on qualifying wages actually paid to employees while they are on eligible family or medical leave.
- The new premium method. An employer that maintains an insurance policy providing qualifying paid family and medical leave may instead calculate the credit based on qualifying premiums it pays or incurs for that coverage.
The IRS currently describes the credit as ranging from 12.5% to 25% of qualifying wages, depending on the level of wage replacement provided. Under the expanded law, qualifying insurance premiums also may generate a credit.
More Employees May Now Qualify
The changes also expand the group of employees employers may take into account.
Previously, an employee generally needed to have worked for the employer for at least one year before becoming a qualifying employee for purposes of the credit. The amended law permits employers to elect to use a six-month employment period instead.
The statute also now focuses on employees who are customarily employed at least 20 hours per week.
That means employers that previously dismissed the Section 45S credit as unavailable or impractical should consider taking another look.
New York Employers Should Pay Particular Attention
There is an important distinction for New York employers.
New York already requires employers to provide certain forms of paid leave, most notably New York Paid Family Leave. Historically, the federal credit was directed toward voluntary employer-provided leave rather than leave that an employer was already legally required to provide.
Under the new law, leave required by State or local law, or paid for by a State or local government, may now be counted in determining whether an employer provides enough paid family and medical leave to be an eligible employer for the federal credit.
But there’s a catch.
The employer can’t use the State- or locally-mandated leave itself to calculate the amount of the federal credit. Likewise, under the premium method, the portion of an insurance premium attributable to leave required by State or local law is not creditable.
So, for New York employers, the analysis may look something like this:
State-mandated leave can help an employer qualify, but it generally cannot generate the federal credit.
That distinction is going to matter when employers and their advisors evaluate New York Paid Family Leave programs alongside employer-provided supplemental benefits.
How the New Insurance Premium Method Works
This is one of the most significant changes.
An employer may be able to claim the Section 45S credit based on premiums paid for an insurance policy that funds qualifying paid family and medical leave.
But employers can’t simply take the entire premium and apply the credit.
If an insurance policy covers both qualifying and nonqualifying benefits, the IRS considers it a blended premium. The employer must allocate the premium between creditable and noncreditable coverage.
The IRS says the allocation may use any reasonable method that:
- is consistent with the terms of the insurance policy;
- uses objective criteria;
- is supported by contemporaneous records; and
- is applied consistently during the taxable year.
This makes documentation particularly important. An employer attempting to take the credit should be able to explain and substantiate how it determined the creditable portion of a blended insurance premium.
Can Employers Use Both Methods?
Yes, potentially.
An employer may use the wage method for some qualifying leave and the premium method for other qualifying leave.
What it can’t do is double dip.
If an employer claims a credit for an insurance premium that funds a particular leave benefit, it can’t later claim another Section 45S credit for the wages or benefits funded by that same premium.
If a leave benefit is funded partly by insurance and partly from the employer’s general assets, however, the employer potentially may claim the premium credit for the insured portion and the wage credit for the employer-funded portion.
What Employers Should Do Now
Employers shouldn’t assume their existing paid leave arrangements automatically qualify for the credit.
Instead, HR and benefits professionals should coordinate with the organization’s tax professionals and consider:
- Reviewing the written paid leave policy. Section 45S imposes specific requirements on employer leave policies, and eligibility for the credit depends on satisfying them.
- Identifying which employees qualify. Employers should evaluate employee tenure and customary weekly hours under the revised eligibility rules.
- Separating mandatory from voluntary leave. Particularly in New York, employers need to distinguish legally-required paid leave from additional employer-provided benefits.
- Reviewing insurance policies. Employers using short-term disability, paid leave, or similar insurance products should determine whether any portion of their premiums fund qualifying family and medical leave.
- Documenting blended-premium allocations. Employers claiming the premium-based credit should establish a reasonable methodology and retain records supporting the allocation.
- Coordinating HR and tax decisions. HR may understand what the leave policy says, while the accountant understands the credit. Neither should conduct this analysis in isolation.
More Guidance Is Coming
Notice 2026-28 isn’t the last word.
The Treasury Department and IRS intend to issue proposed regulations addressing the expanded Section 45S credit. For now, taxpayers may rely on Notice 2026-28 for taxable years beginning after December 31, 2025 and before proposed regulations are issued.
The IRS also has requested public comments on several unresolved questions, including how blended insurance premiums should be allocated and what constitutes a substantial and legitimate business reason for certain employers not to maintain a qualifying written policy. Comments are due October 16, 2026.
The Bottom Line for Employers
Paid family and medical leave is usually viewed as an HR and employee-benefits issue. The expanded Section 45S credit gives employers another reason to view it as a tax-planning issue, too.
Employers that provide paid family or medical leave, purchase insurance covering these benefits, or supplement New York’s mandatory leave programs should have their policies reviewed before assuming they do or don’t qualify for the federal credit.
The opportunity may be especially relevant for employers that previously considered the federal paid leave credit too narrow to be useful. The rules have changed.
The Coppola Firm helps New York employers navigate employment laws, leave requirements, workplace policies, and the practical HR issues that come with running a business.
Questions about how your leave policies fit together? Contact us.
