In Notice 2026-28 (released August 5, 2026), the IRS outlined guidance on calculating the paid family and medical leave (PFML) credit under IRC Section 45S, which was expanded and made permanent by the One, Big, Beautiful Bill Act (OBBBA). Under the amended IRC Section 45S, employers that maintain an insurance policy for PFML during the tax year may elect to calculate the credit based on premiums paid or incurred on that policy rather than only on wages paid to qualifying employees while on leave.

The Notice modifies Notice 2018-71 and states that Treasury and the IRS intend to issue proposed regulations under IRC Section 45S that will be consistent with the guidance in the Notice.

Background

IRC Section 45S provides a tax credit for eligible employers that provide PFML. The provision was originally enacted as part of the Tax Cuts and Jobs Act as a temporary provision, with subsequent extensions, before the OBBBA amended the provision and made it permanent. IRC Section 45S(d) defines an employee by cross-reference to the Fair Labor Standards Act, which generally defines an employee as an individual employed by an employer. Qualifying wages are those subject to the Federal Unemployment Tax Act (FUTA) without regard to the $7,000 FUTA wage limitation.

Before the OBBBA amendments, the IRC Section 45S credit was generally calculated by reference to wages paid to qualifying employees while they were on PFML (the wage method). The OBBBA added a premium method under IRC Section 45S(a)(1), allowing an employer that maintains an insurance policy for PFML to elect to calculate the credit based on premiums paid or incurred by the employer on that policy (the premium method).

The OBBBA also made other changes to IRC Section 45S by:

• Generally treating all persons treated as a single employer under IRC Sections 414(b) and 414(c) as a single employer under the aggregation rule but creating an exception for anyone who establishes, to the Secretary's satisfaction, a substantial and legitimate business reason for failing to provide the required written policy under IRC Section 45S(c)
• Considering leave required by state or local law, or paid by a state or local government, in determining whether an employer provides enough PFML to be an eligible employer (but not using that amount when calculating the credit)
• Amending the definition of qualifying employee to include only employees customarily employed at least 20 hours per week
• Allowing an employer to elect to treat employees as qualifying employees after six months of employment, rather than after one year
• Disallowing a deduction under IRC Section 280C(a) for the portion of premiums paid or incurred that corresponds to the PFML credit determined under IRC Section 45S(a)(1)(B)

New guidance under Notice 2026-28

Premium method

Notice 2026-28 states that the credit and its amount under the premium method depend on whether, and to what extent, the premium funds benefits that would have qualified under the wage method (creditable coverage). Any portion of the premium that funds leave that would not have been creditable under the wage method is ineligible for credit under the premium method.

The Notice identifies several categories of premiums, or portions of premiums, that do not qualify for the credit because they are noncreditable. These include premiums that fund:

• Leave that would not be PFML as defined in IRC Section 45S(e)
• Leave that would be payable to a nonqualifying employee under IRC Section 45S(d) when the premium is paid or incurred
• Coverage for leave that is required by state or local law or paid by a state or local government
• Coverage that provides a benefit that would not constitute wages under IRC Section 45S(g)

Allocation of blended premiums

Notice 2026-28 also addresses "blended premiums" for insurance policies that provide both creditable and noncreditable coverage, which may occur when a policy covers both qualifying PFML and other types of leave, or when it covers both qualifying employees and nonqualifying employees. In this situation, an eligible employer must allocate the premium between creditable and noncreditable coverage using any reasonable method that is consistent with the policy terms and supported by contemporaneous records. To be reasonable, the method must (1) include objective criteria, (2) be applied consistently for the tax year and (3) be applied to all persons treated as a single employer under the IRC Section 45S(c)(3) aggregation rule.

Electing between the premium method and the wage method

Notice 2026-28 permits an employer to claim the credit using the wage method for certain leave and the premium method for other leave, provided the employer does not claim both the premium credit and the wage credit for the same instance of leave. Thus, an employer that pays a premium for creditable coverage and claims a credit for that premium may not also claim a credit for benefits later funded by that same premium, whether by reimbursement or otherwise.

The Notice provides a more flexible result when benefits for a particular instance of leave are funded from more than one source. If benefits paid during an instance of leave are partly funded by the premium and partly funded from the employer's general assets, the employer may claim the wage credit for the portion funded from general assets and the premium credit for the portion funded by the premium.

Applicability dates and reliance

Treasury and the IRS anticipate that forthcoming proposed regulations will be consistent with the Notice and address other issues under IRC Section 45S. The Notice further states that the proposed regulations, once finalized, are expected to apply prospectively to wages and insurance premiums paid or incurred after the final regulations are issued. Taxpayers may rely on the Notice for tax years beginning after December 31, 2025, and before proposed regulations are issued.

Request for comments

Treasury and the IRS request comments on all aspects of Notice 2026-28 and on other issues around implementing the OBBBA amendments to IRC Section 45S. The Notice also specifically requests comments on (1) factors that may be used to allocate a blended premium and on how employers may support and substantiate allocation determinations; (2) applying IRC Sections 45S(a)(1)(B) and 45S(c)(4) to premiums paid or incurred by an employer for PFML through a voluntary PFML program facilitated by a state and administered by a private insurance company; and (3) what constitutes a substantial and legitimate business reason for failing to provide a written policy.

Written comments should be submitted on or before October 16, 2026.

Implications

The guidance provides a more narrow and targeted approach to the premium method, clarifying that premiums are only eligible to the extent that the benefit would be eligible under the wage method.

Several open questions remain from employers as they evaluate eligibility under the new rules of the expanded credit. It is unclear if transition relief will be provided based on the changes to the credit under the OBBBA.

As the Notice did not address questions about the definition of a "substantial and legitimate business reason" for not providing a written policy to a portion of an aggregated group, employers will need to evaluate what that term means for groups of employees that are not covered by current paid leave policies while they await the proposed regulations.

Employers should submit written comments by October 16, 2026, on issues implementing OBBBA amendments to IRC Section 45S.