IRS Notice 2026-28 Lets Employers Claim Paid Leave Credit on Insurance Premiums

The IRS on August 5 released guidance on the employer credit for paid family and medical leave, the first detailed rules since last year's tax law made the credit permanent and allowed companies to claim it on insurance premiums. Notice 2026-28 explains how the new premium method works, how to split premiums that cover more than qualifying leave, and when an employer may use both methods in the same year. Employers may rely on the notice for taxable years beginning after December 31, 2025.

What changed

Section 45S was created in 2017 as a temporary credit and extended twice. The One, Big, Beautiful Bill Act, enacted July 4, 2025, made it permanent and reshaped it in several ways described in the notice:

• A premium method. Employers that buy an insurance policy providing paid family and medical leave may elect to compute the credit on premiums paid or incurred during the year, rather than only on wages paid to employees while on leave. The rate is determined without regard to whether anyone actually took leave that year.
• Broader employee eligibility. Qualifying employees are limited to those customarily employed at least 20 hours a week, and employers may elect to include workers after six months of service instead of one year.
• State-mandated leave. Leave required or paid for by state or local governments now counts toward determining whether an employer is eligible, though it still cannot generate credit.
• Aggregation. Related businesses under common control are treated as a single employer, with an exception for a person that shows a substantial and legitimate business reason for not providing a qualifying written policy.

The notice clarifies that a premium qualifies only to the extent it funds leave that would earn a credit under the wage method. Coverage for non-qualifying employees, for leave required by state law or for benefits that would not count as wages is excluded. A blended premium must be allocated using a reasonable, objective method applied consistently and supported by contemporaneous records. Employers may use the wage method for some leave and the premium method for other leave, but not both for the same instance of leave.

Who is affected

The credit is aimed at employers that voluntarily offer paid leave beyond what state law requires. Under the IRS's existing rules, the written policy must provide at least two weeks of paid leave a year at no less than 50% of normal wages, and the credit applies to up to 12 weeks of leave per employee per year. Eligible employees must also fall below a prior-year compensation cap. For closely held businesses, particularly those that already carry short-term disability or leave policies, the premium method may make the credit easier to claim because it does not require tracking each leave payment.

The after-tax math

The credit ranges from 12.5% to 25% of qualifying payments. It starts at 12.5% when leave pays 50% of normal wages and rises by 0.25 percentage point for each point above 50%, reaching 25% at full pay. The credit is not free money on top of the deduction: under Section 280C, the employer's deduction for wages or premiums is reduced by the amount of the credit.

Example, illustrative round numbers and an assumed 21% corporate rate: a company pays an eligible employee earning $1,000 a week full wages for 12 weeks of qualifying leave, or $12,000. At full pay the credit rate is 25%, producing a $3,000 credit. The deduction falls from $12,000 to $9,000, so the deduction is worth $1,890 instead of $2,520. The net benefit of claiming the credit is about $2,370, or roughly 20% of the leave cost.

Moves to discuss with your advisor

• Whether the company's written leave policy meets the 45S requirements, including the non-interference language the IRS requires.
• Whether a leave insurance policy is priced so that the premium method yields more credit than the wage method.
• How to allocate blended premiums and document that allocation.
• How the new six-month and 20-hour rules change which workers can be counted.

What to watch

The Treasury Department and IRS plan proposed regulations consistent with the notice. They requested comments by October 16, 2026, including on how to allocate blended premiums, how voluntary state-facilitated programs administered by private insurers should be treated, and what counts as a legitimate business reason for not having a written policy. Final regulations are expected to apply only after they are issued.

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