The One Big Beautiful Bill Act (OBBBA) gives employers another way to think about the cost of employer-paid leave. The Act strengthens and makes permanent the Section 45S tax credit — the paid family and medical leave tax credit — turning a benefit many employers already fund into a real opportunity to recover dollars.

For organizations weighing the OBBBA paid leave tax credit, understanding what’s changed — and what it takes to qualify — is the first step.

What’s changing

  • Is the 45S tax credit permanent? Previously a temporary provision that Congress kept extending, 45S no longer needs periodic renewal.
  • Eligibility kicks in faster. The required length of an eligible leave policy has dropped from one year to six months.

Multi-state employers get a meaningful win. Wages paid under a state Paid Family and Medical Leave (PFML) program previously couldn’t count toward the credit. Now, thanks to the state paid leave top-off tax credit provision, the “top-off” portion an employer pays above the state benefit can be counted toward the credit. For example, if a state program replaces 60% of wages and the employer tops off the remaining 40%, that 40% portion can factor into the credit calculation. If you decide not to claim the credit for the top-off of wages, you may instead claim a credit for premiums paid for PFML coverage — but you can’t claim both.

Why it’s worth considering

  • It’s an opportunity. It’s not an expense but an opportunity to recover costs on premiums you’re already paying.
  • How to calculate the 45S tax credit. The credit rate scales with wage replacement level. For example, an employer providing a 75% wage replacement policy who paid $10,000 in premiums would have an 18.75% credit rate, generating a $1,875 credit.
  • Those recovered dollars can be reinvested. Organizations can use recovered funds to help pay for privatized paid family and medical leave programs to expand an existing leave benefit (say, from six weeks to eight) or can reinvest in leave-based benefits.

45S tax credit eligibility requirements

Qualifying leave reasons are limited to leave reasons under the federal Family and Medical Leave Act (FMLA), including the birth of a child, care of a spouse, an employee’s own health condition and other similar situations. A policy must cover all these reasons to qualify — not just one in isolation, such as parental leave alone. Reasons outside FMLA, such as domestic partner leave, don’t qualify.

A written, compliant leave policy is required, and it must do the following:

  • Cover employees with a minimum of six months of tenure.
  • Cover part-time employees working at least 20 hours per week — the 45S tax credit for part-time employees provision is a common gap, since many employer policies only cover full-time staff.
  • Provide at least two weeks of job-protected paid leave of not less than 50% of wages normally paid.

There is a compensation limit: Only employees earning less than $96,000 can be included in the credit calculation.

What this means for employers

  • Start with your policy. Review whether your current paid leave program meets the requirements, as many employers already offering paid parental or caregiving leave haven’t claimed the credit.
  • Check your wage levels against the credit’s replacement-rate thresholds to help determine the credit rate for your organization.
  • Confirm your record-keeping is credit-ready. Employers relying on spreadsheets or an outsourced leave vendor should confirm their vendor or carrier can support the documentation needed for the credit calculation.
  • Consult tax professionals. To best confirm sufficient federal tax liability to use the credit and whether the annual calculation is worth the effort, work with tax professionals with expertise in the matter.
  • Understand the levers. If you haven’t claimed the credit before, the first step is understanding what levers — like extending coverage to part-time employees — would be needed to qualify.

What's Still Coming

The IRS will issue proposed regulations expanding on Notice 2026-28 (issued August 3, 2026). Employers can rely on this notice to calculate their 2025 and 2026 taxes while awaiting final regulations. Several items remain to be clarified through the rulemaking process, including:

  • How employers should allocate costs in blended premium situations (e.g., policies covering both PFML and non-PFML leave, or both eligible and ineligible employees).
  • How the premium method applies to premiums paid for state-facilitated, privately administered PFML programs.
  • What constitutes a “substantial and legitimate business reason” for failing to maintain a written PFML policy.

The IRS is accepting public comments on this guidance through October 16, 2026, to inform the proposed regulations. Your HUB advisor can help you monitor these developments and adjust your approach as guidance is finalized.

IRS Guidance: Notice 2026-28

Ready to see whether your paid leave program qualifies for the 45S credit? Connect with your HUB advisor.