New IRS Guidance on PFML Credit: What Employers Need to Know

In a significant policy shift aimed at supporting working families, the IRS has issued new guidance allowing employers to claim a federal tax credit not only on wages paid during family and medical leave but also on the premiums they pay for family and medical leave insurance. This change, encapsulated in IRS Notice 2026-28, was announced on August 5, 2025, following the enactment of the One Big Beautiful Bill Act (OBBBA) on July 4, 2025. This act made the Paid Family and Medical Leave Tax Credit permanent, alleviating uncertainties that plagued employers regarding their benefits programs in the past.

The implications of these changes are vast, particularly for businesses looking to enhance their employee benefits while managing costs. For many employers, especially small businesses, the financial burden of offering paid leave can be substantial. The recent updates aim to provide greater incentives to offer these essential benefits, ultimately supporting employees who need time off to care for family members or recover from illnesses.

Understanding the PFML Tax Credit

The Paid Family and Medical Leave Tax Credit, codified under section 45S of the Internal Revenue Code, allows employers to receive a credit ranging from 12.5% to 25% of qualifying wages paid to employees on leave, covering up to 12 weeks per qualifying employee per tax year. Prior to the OBBBA, this credit was subject to frequent expiration and renewal, creating a cycle of uncertainty for employers who sought to offer paid family leave benefits.

With the introduction of the premium-based calculation method, employers can now calculate the credit based on premiums paid for qualifying leave insurance policies. This offers a streamlined approach that does not require tracking wages paid to employees on leave, greatly simplifying the administrative burden for HR departments.

Key Changes to Employee Eligibility

The OBBBA has also broadened the pool of employees eligible for the PFML credit. Employers can now claim the credit for employees with a minimum of six months of service, a significant decrease from the previous one-year requirement. This change allows a greater number of employees to benefit from paid leave, particularly in industries like retail and hospitality, where part-time work is common. Furthermore, part-time employees who customarily work at least 20 hours per week are now covered under the PFML provisions.

Implications for Employers

The expansion of eligibility is especially impactful in sectors characterized by high turnover and part-time workforces. Employers will need to adjust their policies accordingly to ensure compliance with the updated regulations and maximize the benefits available through the PFML credit. The new guidance encourages a more inclusive approach to employee benefits, enabling companies to support a diverse workforce and improve employee retention.

State PFML Programs and Federal Coordination

As of now, there are fourteen states and the District of Columbia that have implemented or are rolling out mandatory PFML programs. Employers in these states can count state-required leave toward credit eligibility, although they cannot include it in the credit calculation itself. This distinction becomes crucial for businesses navigating both federal and state regulations, ensuring they optimize their benefits offerings without running afoul of compliance requirements.

States like California, New York, New Jersey, Washington, Massachusetts, Colorado, Connecticut, and Oregon have established PFML programs, and employers in these regions must stay informed about how the new federal guidance interacts with state laws. As more states adopt PFML mandates, understanding the interplay between federal and state programs will be a key consideration for employers.

Policy Requirements and Compliance

In addition to the changes in eligibility and calculation methods, employers must now maintain a written Paid Family and Medical Leave policy that complies with the updated section 45S requirements. This policy must be in place and operational by the start of the first full year in which the amended rules apply, which is 2026. The requirement for a written policy is already in effect, and employers should prioritize drafting or updating their policies to align with the new federal guidelines.

• Employers must document their PFML policy comprehensively to ensure compliance.
• Policies should reflect the new eligibility criteria and premium calculation methods.
• Employers are encouraged to seek legal or HR consultation to navigate these updates effectively.

Key Takeaways

• The IRS has expanded the PFML credit to include insurance premiums, simplifying the claims process for employers.
• Eligibility for the credit now includes employees with at least six months of service and part-time workers.
• Employers must maintain a compliant written PFML policy by 2026.
• State PFML mandates interact with federal regulations, requiring careful navigation by employers.
• The credit ranges from 12.5% to 25% of qualifying wages, covering up to 12 weeks per employee per tax year.

Frequently Asked Questions

What is the Paid Family and Medical Leave Tax Credit?

The Paid Family and Medical Leave Tax Credit is a federal incentive that allows employers to claim a tax credit on wages paid to employees who take leave to care for a family member or recover from a serious health condition. Under the recent changes, employers can also claim credits based on the premiums paid for leave insurance, making it easier to offer these benefits without tracking specific wages.

How do the changes affect part-time employees?

The recent IRS guidance has made part-time employees who work at least 20 hours per week eligible for the Paid Family and Medical Leave Tax Credit. This is a significant change from the previous one-year service requirement, opening the door for many part-time workers to receive paid leave benefits, thus enhancing workforce inclusivity and support.

What do employers need to do to comply with the new regulations?

Employers must create and maintain a written PFML policy that aligns with the updated requirements. This policy should be in effect before the new rules come into play in 2026. Employers should also stay informed about both state and federal regulations to ensure they are maximizing their benefits offerings while remaining compliant.

How does the credit interact with state PFML programs?

Employers in states with existing PFML mandates can count the leave provided under state laws toward eligibility for the federal PFML credit but cannot include it in the calculation of the credit itself. This relationship necessitates that employers carefully consider both their state obligations and federal benefits when designing their leave policies.