IRS Issues Crucial Guidance on Revamped Section 45S Paid Family and Medical Leave Credit Under 2025 Tax Law

WASHINGTON — In a move designed to reshape how American businesses support their workforce, the Internal Revenue Service (IRS) has released Notice 2026-28, providing critical administrative guidance for employers navigating the newly expanded employer credit for paid family and medical leave (PFML). The guidance details how businesses can utilize a novel "premium-based method" to calculate tax credits under Section 45S of the Internal Revenue Code, a provision permanently restructured by the landmark tax legislation enacted last year.

The release of the notice marks a pivotal moment for corporate human resources departments, tax professionals, and business owners nationwide. As companies adjust to the sweeping legislative changes introduced under the 2025 tax law—formally known as H.R. 1, Public Law 119-21, and widely referred to as the Omnibus Business and Budget Benefits Act (OBBBA)—the new IRS guidance offers a vital roadmap for compliance and tax optimization during the first full operational year of the revamped program.

Main Facts

At the core of the new guidance is the operationalization of the permanent Section 45S credit, which underwent substantial legislative enhancements via the OBBBA. While prior iterations of the PFML credit were temporary and limited primarily to direct wage reimbursements, the 2025 tax law permanently codified the credit and significantly broadened its scope to encompass both direct wage payments and insurance premiums.

Key Elements of Notice 2026-28:

• The Premium-Based Method: For the first time, employers can claim the Section 45S tax credit not only for wages paid to employees during qualifying PFML leave, but also for premiums paid toward PFML insurance policies.
• Credit Percentage Structure: Eligible employers providing qualifying paid family and medical leave can claim a general business tax credit ranging from 12.5% to 25% of wages paid (or qualifying premiums allocated) to qualifying employees for up to 12 weeks of family and medical leave per tax year.
• Core Administrative Focus: Notice 2026-28 specifically addresses how the new premium-based method compares side-by-side with the traditional wage-based method, how businesses must allocate qualifying insurance premiums, and the mechanics of electing between the two calculation methods.
• Compliance Mandate: Employers must ensure that their written leave policies are fully compliant with the amended Section 45S requirements during 2026—the first full calendar year that the statutory changes are in active effect.
• Future Regulatory Roadmap: The IRS has formally announced that Notice 2026-28 serves as an interim bridge, with comprehensive proposed regulations forthcoming to provide deeper statutory certainty.

Chronology of Events

The path toward the current regulatory landscape involves a carefully orchestrated timeline of legislative overhaul, stakeholder advocacy, and administrative implementation stretching from the passage of the 2025 tax code modifications to the current rollout of IRS Notice 2026-28.

1. Late 2025: The Enactment of H.R. 1 (OBBBA)

The legislative foundation was laid when Congress passed and the administration signed H.R. 1 (P.L. 119-21). This sweeping legislation transformed the tax code by making the Sec. 45S PFML credit permanent. Crucially, the bill expanded the credit’s availability to a significantly broader demographic of employers and introduced the groundbreaking inclusion of insurance premiums alongside direct employee wages.

2. March 2026: AICPA Formal Advocacy

As corporations and certified public accountants began analyzing the complex interactions of the revamped statute, the Association of International Certified Professional Accountants (AICPA) stepped in. In March 2026, the organization submitted a formal comment letter to the Department of the Treasury and the IRS. The letter highlighted urgent areas requiring regulatory clarity—including calculation mechanics, employee considerations, and eligible employer definitions. Notably, the AICPA strongly advocated for regulatory flexibility that would permit employers to utilize a combination of both wage-based and premium-based calculation methods.

3. April 2026: Issuance of Notice 2026-28

Responding directly to market ambiguity and professional feedback, the IRS issued Notice 2026-28 on Wednesday. The guidance formally established the framework for the premium-based method, outlined allocation rules, and set expectations for upcoming comprehensive proposed regulations.

Supporting Data and Structural Mechanics

To fully grasp the financial impact of Notice 2026-28, employers must understand how the revamped Section 45S credit operates mechanically. The statute is designed to incentivize businesses to offer up to 12 weeks of paid leave, enabling workers to recover from serious health conditions or tend to immediate family members suffering from major medical issues.

Wage-Based vs. Premium-Based Methods

Under the previous statutory framework, the tax credit was strictly tethered to the wages paid to an employee while on leave, provided the rate of payment was at least 50% of the employee’s normal wages.

With the introduction of the premium-based method via Notice 2026-28, employers who choose to purchase commercial or state-mandated PFML insurance policies rather than self-insuring the leave can now offset a portion of those insurance costs.

• The Wage Method: Calculates the credit directly as a percentage (12.5% to 25%) of the actual cash wages disbursed to employees during their approved leave period (capped at 12 weeks per employee annually).
• The Premium Method: Allows businesses to allocate insurance premiums paid for coverage that provides the qualifying family and medical leave benefits.

Notice 2026-28 details the precise mathematical guardrails required to allocate these premiums properly, ensuring that businesses do not double-dip or misallocate costs across non-qualifying employee pools or extraneous insurance riders. Furthermore, the guidance establishes the procedural rules for how an eligible employer must make their annual election between utilizing the wage method versus the premium method.

Qualifying Leave Parameters

To qualify for the credit under either calculation method, an employer’s written leave policy must meet specific statutory benchmarks:

• Must provide at least two weeks of annual paid family and medical leave to all qualifying employees (pro-rated for part-time workers).
• The payment rate must equal at least 50% of the wages normally paid to the employee.
• The policy must include a "non-interference" clause ensuring employees face no retaliation or loss of status for utilizing the benefit.

Official Responses and Stakeholder Perspectives

The rollout of Notice 2026-28 has drawn praise from administration officials who view the policy as a vital bridge between macroeconomic competitiveness and working-class family support.

"The guidance issued Wednesday provides employers with the clarity they need to claim the enhanced credit, supporting American workers, families, and businesses," stated Treasury Secretary Scott Bessent in an official news release. Secretary Bessent emphasized that the administration remains committed to reducing administrative friction for businesses striving to offer robust employee benefits.

Tax policy analysts and business groups have similarly welcomed the interim guidance, though many note that tax departments must move quickly to audit their internal record-keeping systems. Because the rules apply directly to the 2026 tax year—the inaugural full year of the permanent OBBBA provisions—companies have a narrow window to ensure their written policies and payroll systems align with IRS expectations.

The IRS reiterated in its announcement that Notice 2026-28 is merely the first phase of administrative relief. The agency confirmed that it intends to issue formal proposed regulations in the near future. These upcoming rules will codify the guidance into the Code of Federal Regulations and address more complex fringe cases, multi-state employer compliance, and corporate partnership structures.

Implications for Employers and Tax Practitioners

The permanent codification of Section 45S and the release of Notice 2026-28 carry profound strategic implications for corporate human resources and tax compliance strategies throughout the United States.

1. Immediate Policy Review Required

Employers cannot afford to take a passive approach. Because 2026 represents the first full year under the OBBBA rules, HR departments must immediately review their written leave policies. A failure to update handbooks to reflect the exact statutory requirements—such as minimum wage replacement thresholds and non-retaliation protections—can completely invalidate an employer’s eligibility for the credit, regardless of whether they choose the wage-based or premium-based calculation route.

2. Strategic Choice Between Wage and Premium Methods

CFOs and corporate tax directors must evaluate whether self-insuring paid leave (and utilizing the wage-based credit) or purchasing third-party insurance policies (and leveraging the new premium-based method) yields a superior return on investment. For smaller businesses that previously found the administrative burden of tracking individual wage disbursements during leave too cumbersome, the premium-based method offers a simplified, predictable accounting alternative.

3. Accounting and Documentation Overhauls

Accounting systems must be reconfigured to track qualifying premiums separately from general corporate liability insurance or health insurance premiums. As outlined in Notice 2026-28, proper allocation is mandatory. Auditors will scrutinize how insurance costs are apportioned between qualifying PFML coverage and other executive or non-qualifying benefits.

4. Continued Engagement with Professional Bodies

Given that the IRS has signaled that comprehensive proposed regulations are still on the horizon, tax practitioners and corporate advisory teams are encouraged to monitor ongoing developments. Professional organizations like the AICPA will likely continue submitting technical feedback as businesses encounter real-world friction points during the 2026 tax filing season.

For more information on tax policy updates or to submit commentary regarding ongoing regulatory developments, tax professionals are advised to consult official IRS publications or contact industry liaison representatives directly.