IRS Notice 2026-28: What Employers Should Know About the Paid Family and Medical Leave Tax Credit

The IRS has released Notice 2026-28, providing important guidance for employers that offer paid family and medical leave. The notice explains recent changes to the federal tax credit under Internal Revenue Code Section 45S, including a new option for employers that fund paid leave benefits through an insurance policy.

For business owners, the biggest takeaway is that the paid family and medical leave tax credit is now permanent, and eligible employers may be able to calculate the credit using either qualifying wages or qualifying insurance premiums.

The rules are detailed, however, and not every paid leave expense or insurance premium qualifies. Here is what employers need to know.

What Is the Section 45S Paid Family and Medical Leave Tax Credit?

Section 45S provides a federal business tax credit to eligible employers that offer qualifying paid family and medical leave to employees under a written policy.

The credit was originally created as a temporary provision by the Tax Cuts and Jobs Act. The legislation commonly known as the One Big Beautiful Bill Act made the credit permanent and updated several of its requirements.

Among the changes addressed in IRS Notice 2026-28 are:

• A new method for calculating the credit based on qualifying insurance premiums

• Revised rules for determining which employees qualify

• Updated employer aggregation rules

• Clarification of how state- or locally required paid leave affects eligibility

Employers Can Choose Between Two Calculation Methods

Employers may now elect to calculate the Section 45S credit under either the wage method or the premium method.

The wage method

Under the wage method, the credit is based on qualifying wages actually paid to eligible employees while they are on family and medical leave.

The premium method

Under the new premium method, an employer that maintains a paid family and medical leave insurance policy may calculate the credit using qualifying premiums paid or incurred during the tax year.

An employer does not need to have an employee take family or medical leave during that year for premiums to qualify. Eligibility is based on whether the policy funds benefits that would qualify for the credit if those benefits were paid.

This option may be especially relevant for employers that use an insurance policy to provide paid leave rather than paying all benefits directly from company funds.

Not Every Insurance Premium Qualifies

IRS Notice 2026-28 refers to qualifying insurance protection as "creditable coverage." A premium, or a portion of a premium, is creditable only when it funds a benefit that would qualify under the wage method.

A premium generally does not qualify to the extent that it funds:

• Leave that does not meet the Section 45S definition of family and medical leave

• Benefits for someone who is not a qualifying employee when the premium is paid or incurred

• Leave required by state or local law

• Leave paid for by a state or local government

• Benefits that would not be treated as wages for purposes of Section 45S

Employers should review policy terms carefully rather than assuming the entire cost of a paid leave policy is eligible for the credit.

Blended Insurance Premiums Must Be Allocated

Some insurance policies provide both qualifying and nonqualifying coverage. For example, a policy may cover several types of leave or include both qualifying and nonqualifying employees. The IRS calls the cost of this type of policy a blended premium.

When a premium is blended, the employer must allocate it between creditable and noncreditable coverage. Notice 2026-28 permits any reasonable allocation method that:

• Is consistent with the insurance policy's terms

• Uses objective criteria

• Is supported by records created at the time of the allocation

• Is applied consistently throughout the tax year

• Is applied consistently to all entities treated as a single employer under the aggregation rules

The documentation requirement is important. Employers should establish and record their allocation method before claiming the credit, not attempt to recreate the calculation later.

Can an Employer Use Both Methods?

Yes. An employer may use the wage method for certain leave and the premium method for other leave, but the same benefit cannot generate two credits.

For example, if an employer claims a credit for a premium that funds a particular leave benefit, the employer cannot later claim a second credit for 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, the employer may be able to claim:

• The premium-based credit for the insured portion

• The wage-based credit for the portion paid from the employer's general assets

Accurate records will be essential to show how each portion of the benefit was funded.

Who Is a Qualifying Employee?

The updated law generally limits qualifying employees to those customarily employed for at least 20 hours per week. It also allows an employer to elect to include employees after six months of employment instead of waiting one year.

Because employee eligibility affects both wage-based and premium-based calculations, employers should confirm that their payroll, benefits, and insurance records use consistent employee information.

Related Companies May Be Treated as One Employer

The updated aggregation rule generally treats entities under common control as a single employer under Sections 414(b) and 414(c). This can affect whether the written-policy requirements are satisfied and how a blended premium allocation must be applied.

The law includes a limited exception when an entity can establish a substantial and legitimate business reason for not providing a qualifying written policy. Notice 2026-28 does not define that standard, and the IRS has specifically requested public comments on it. Businesses with related entities should seek advice before relying on the exception.

How State and Local Paid Leave Rules Affect the Credit

Paid leave required by state or local law, or paid for by a state or local government, may be considered when determining whether an employer provides enough leave to qualify as an eligible employer.

However, that mandated or government-funded leave is not included when calculating the amount of the federal Section 45S credit.

Employers operating in multiple states may need to separate voluntary employer-provided benefits from state- or locally required benefits before calculating the credit.

The Credit Affects the Employer's Tax Deduction

Employers cannot claim both the Section 45S credit and a tax deduction for the same qualifying cost. When the premium method is used, the deduction for paid or incurred premiums is reduced by the portion represented by the credit. A similar deduction limitation continues to apply to wages used to calculate the wage-based credit.

This adjustment should be included when comparing the potential tax benefit of the wage and premium methods.

When Does the IRS Guidance Apply?

Taxpayers may rely on Notice 2026-28 for tax years beginning after December 31, 2025, and before the IRS issues proposed regulations.

The IRS and Treasury Department expect the future proposed regulations to follow the guidance in the notice. Final regulations are expected to apply prospectively to wages and insurance premiums paid or incurred after those final regulations are issued.

The IRS is also accepting public comments on the notice through October 16, 2026, with later comments considered if they do not delay the proposed regulations.

What Employers Should Do Now

Employers that provide paid family and medical leave should consider taking the following steps:

• Review the company's written paid leave policy for Section 45S compliance.

• Determine whether the wage method, premium method, or a combination may provide the best result.

• Ask the insurance carrier or benefits administrator to identify the coverage funded by each premium.

• Separate qualifying paid leave from benefits required or funded by state or local governments.

• Create a reasonable, objective allocation method for blended premiums.

• Maintain records showing employee eligibility, premium allocations, benefit funding, and wages paid during leave.

• Coordinate with a tax professional before claiming the credit.

The new premium method could create a valuable opportunity for employers, including those that pay for qualifying coverage even when no employee takes leave during the year. Careful analysis and documentation will be necessary to support the credit and prevent double counting.

How Kamish & Associates Can Help

The Section 45S credit can involve payroll records, employee eligibility rules, insurance policy terms, state leave requirements, and related deduction adjustments. Kamish & Associates can help your business review the available calculation methods, identify potentially qualifying costs, and prepare the documentation needed to support the credit.

Contact Kamish & Associates to discuss how IRS Notice 2026-28 may affect your business and whether the paid family and medical leave tax credit could be available to you.

This article is for general informational purposes only and does not constitute tax or legal advice. Tax rules apply differently based on each employer's circumstances. Consult a qualified professional regarding your specific situation.