Treasury and the IRS issued Notice 2026-28 on August 5, providing the first substantive guidance on the Section 45S employer credit for paid family and medical leave since the Working Families Tax Cuts made it permanent. Two changes matter most for small employers: the credit can now be claimed on insurance premiums paid — even in a year when no employee takes leave — and the service threshold for a qualifying employee drops from one year to six months.
If you carry a paid family and medical leave insurance policy, you may have a credit sitting in an account you’ve been treating as a plain expense.
What happened
Section 45S was scheduled to sunset. The Working Families Tax Cuts eliminated that sunset, made the credit permanent, and expanded it. Notice 2026-28 explains how the expanded version actually works, and taxpayers may rely on it for tax years beginning after December 31, 2025 — meaning the current year — pending proposed regulations.
The credit itself. It’s a general business credit worth 12.5% to 25% of qualifying wages, covering up to 12 weeks of family and medical leave per employee per tax year. The rate is not flat: it starts at 12.5% when you replace 50% of normal wages and rises 0.25 percentage points for each percentage point above that floor, capping at 25% when you replace 100% of wages. Replace 70% of wages, and you’re at a 17.5% credit.
The new premium method. This is the structural change. Employers who maintain an insurance policy providing paid family and medical leave can now claim the credit on premiums paid, “regardless of whether qualifying employees actually used leave” during the year. Previously the credit only attached to wages actually paid out during leave — which meant a small employer who bought coverage but had no one take leave got nothing.
What premiums don’t count. Notice 2026-28 draws firm lines. Premiums are noncreditable to the extent they fund leave that isn’t FMLA-qualifying, coverage for non-qualifying employees, state or locally mandated leave, or non-wage benefits. Where a policy blends creditable and noncreditable coverage, you must allocate using reasonable methods consistent with the policy terms, supported by contemporaneous records, applied consistently year to year.
You can use both methods — carefully. An employer may apply the premium method to some leave benefits and the wage method to others, but cannot claim credit for identical benefits under both. Split-funded benefits are workable: premium credit on the insured portion, wage credit on the employer-funded portion.
Eligibility expansions. Qualifying employees must be customarily employed at least 20 hours per week, and employers may now elect to include employees at six months of service rather than one year. Leave provided under a state or local mandate counts toward satisfying the eligible-employer threshold.
The baseline requirements haven’t changed. To be an eligible employer you still need a written policy providing at least two weeks of annual paid leave to full-time employees (pro-rata for part-time), at a minimum 50% wage replacement rate, with non-interference and non-discrimination provisions.
Aggregation now follows IRC §414(b) and (c) controlled group definitions, and a new exception offers relief where a taxpayer can show a “substantial and legitimate business reason” for noncompliance with the written policy requirement. Under §280C(a), you cannot deduct the premium amount equal to the credit claimed.
Public comments are due October 16, 2026 (docket IRS-2026-0496).
“The changes enacted by the Working Families Tax Cuts will make more employers eligible for the credit.” — IRS CEO Frank J. Bisignano
Why it matters
Section 45S has historically been one of the least-claimed credits available to small employers, largely because the wage-based mechanics only paid off in a year when someone actually took extended leave. A 12-person company might carry a policy for three years and claim nothing.
The premium method changes the arithmetic. A recurring, predictable insurance premium is now a recurring, predictable credit — the kind of item that belongs in a tax plan rather than a year-end surprise.
The six-month service threshold matters more than it sounds, too. In high-turnover industries — food service, retail, construction, home services — a meaningful share of a workforce never crosses the one-year line. Those employees can now be qualifying employees.
What this means for Washington employers specifically
This is where it gets tricky, and where a lot of businesses will get it wrong.
Washington has a state-mandated paid family and medical leave program. Notice 2026-28 is explicit on the split: state-mandated leave counts toward satisfying the eligible-employer threshold — it helps you clear the two-weeks-of-leave bar — but it cannot be taken into account in calculating the credit itself. WA PFML premiums are not creditable premiums.
So the practical question for a Washington business is whether you provide paid leave above and beyond the state program, and whether any of it is insured. If you carry a supplemental or voluntary plan, or a private plan approved in lieu of the state program, that’s where to look.
Four things to do:
- Find out whether you have a written policy that meets the standard — two weeks minimum, 50% replacement, with non-interference and non-discrimination language. Many small employers provide qualifying leave in practice but have never documented it, and the credit requires the document.
- Pull your leave-related insurance premiums out of the general insurance expense account. If they’re commingled with general liability and workers’ comp, no one will find them at tax time. Give them their own GL account now.
- Build the allocation support before year-end, not after. The notice requires contemporaneous records for blended-coverage allocation. Reconstructing that in March from a policy document is exactly the position you don’t want to be in under exam.
- Model both methods. If you have a low-utilization year, the premium method almost certainly wins. If you had a year with real leave usage at a high replacement rate, the wage method may be worth more. Run both.
The bottom line
A credit that was temporary, narrow, and easy to miss is now permanent, broader, and — with the premium method — claimable in years when nothing happens. That combination makes it worth a specific look rather than a general awareness. For Washington employers, the key discipline is separating what the state program covers from what your own policy adds on top, because only the second one produces a credit. Comments on the guidance close October 16, with proposed regulations to follow.
Sources:
IRS — Treasury, IRS issue guidance on the permanent expansion of paid family and medical leave
Current Federal Tax Developments — Analyzing the wage method and new premium method under Notice 2026-28
