Notice 2026-28, 2026-28 I.R.B. 1 (Aug. 5, 2026)

The enactment of the One, Big, Beautiful Bill Act (OBBBA), Pub. L. No. 119-21, 139 Stat. 72 (July 4, 2025), has fundamentally reshaped the tax landscape for employer-provided fringe benefits by making the employer credit for paid family and medical leave under Internal Revenue Code (I.R.C.) § 45S permanent. Prior to the OBBBA, the credit was a temporary incentive prone to statutory expirations. Notice 2026-28 provides critical administrative guidance regarding a significant statutory expansion: the addition of the “premium method” under I.R.C. § 45S(a)(1)(B). This new calculation method permits eligible employers to elect to determine the credit based on the premiums paid or incurred for an insurance policy providing family and medical leave coverage, rather than solely on wages actually paid to employees on leave.

This article provides a technical examination of Notice 2026-28 and I.R.C. § 45S, detailing the statutory background of Section 45S, the mechanical application of the traditional wage method, the operation of the new premium method, the complex rules governing “creditable coverage” and “blended premiums,” aggregation rule modifications, double-dipping prohibitions, and the compliance implications of the corresponding business deduction disallowances under I.R.C. § 280C(a).

Statutory History and the Shift to Permanence

The paid family and medical leave credit was originally introduced to the Code as I.R.C. § 45S by the Tax Cuts and Jobs Act (TCJA), Pub. L. No. 115-97, § 13403, 131 Stat. 2504 (December 22, 2017). As originally enacted, the credit was a temporary provision applicable only to wages paid in taxable years beginning on or before December 31, 2019. Under I.R.C. § 45S(i), the sunset provision was subsequently extended by the Further Consolidated Appropriations Act, 2020, Pub. L. No. 116-94, 133 Stat. 2534 (December 20, 2019), and the Consolidated Appropriations Act, 2021, Pub. L. No. 116-260, 134 Stat. 1182 (December 27, 2020).

The OBBBA eliminated the sunset provision of I.R.C. § 45S(i), making the paid family and medical leave credit permanent. By making the credit a permanent fixture of the general business credit under I.R.C. § 38(b)(32), Congress has signaled long-term support for paid leave benefits, prompting employers to formalize their policies. To understand the impact of Notice 2026-28, tax professionals must first understand the fundamental statutory definitions governing the credit:

Employee Definition: For the purposes of the credit, I.R.C. § 45S(d) defines an employee by cross-referencing section 3(e) of the Fair Labor Standards Act (FLSA), 29 U.S.C. § 203(e), which generally defines an employee as any individual employed by an employer.
Qualifying Wages: Under I.R.C. § 45S(g), qualifying wages are wages subject to the Federal Unemployment Tax Act (FUTA) pursuant to I.R.C. § 3306(b), determined without regard to the statutory $7,000 FUTA wage limitation.

Eligible Employer and Written Policy Requirements

To qualify for the I.R.C. § 45S credit under either the wage or premium method, a taxpayer must meet the statutory definition of an “eligible employer”. Under I.R.C. § 45S(c)(1), an eligible employer is any employer who has in place a written policy that satisfies two core requirements:

Minimum Duration of Leave: The policy must provide not less than 2 weeks of annual paid family and medical leave to each qualifying full-time employee. For part-time qualifying employees (those customarily employed for not less than 20 hours per week under I.R.C. § 45S(d)(3)), the policy must provide a pro-rata equivalent amount of annual paid leave based on the ratio of expected weekly hours to full-time hours.
Minimum Rate of Payment: The policy must require that the rate of payment under the paid leave program is not less than 50 percent of the wages normally paid to the employee for services performed for the employer.

For employers who employ “added employees” (qualifying employees who are not covered under Title I of the Family and Medical Leave Act of 1993), I.R.C. § 45S(c)(2) imposes non-interference and non-discrimination requirements. The employer’s written policy must explicitly ensure that the employer “will not interfere with, restrain, or deny the exercise of or the attempt to exercise, any right provided under the policy” and “will not discharge or in any other manner discriminate against any individual for opposing any practice prohibited by the policy”.

Statutory Mechanics of the Wage Method

Prior to the addition of the premium method, the paid family and medical leave credit could only be determined via what is now formally designated as the “wage method”. Under I.R.C. § 45S(a)(1)(A), the wage method credit is equal to the “applicable percentage of the amount of wages paid to qualifying employees” during any period in which they are on family and medical leave.

The statutory mechanics of the wage method are governed by precise mathematical formulas and employee-level limitations set forth under I.R.C. § 45S:

The Applicable Percentage Credit Rate

The credit rate is not a fixed percentage but is instead dynamically scaled based on the rate of wage replacement provided to employees on leave. Pursuant to I.R.C. § 45S(a)(2), the “applicable percentage” begins at a baseline of 12.5 percent. This baseline is increased by 0.25 percentage points for each percentage point by which the rate of payment provided under the employer’s written policy exceeds 50 percent of normal wages.

However, the statute establishes a maximum ceiling on the credit rate: the applicable percentage cannot exceed 25 percent. This creates a graduated credit structure as follows:

50% Wage Replacement (Minimum): Provides an applicable percentage credit rate of 12.5% of qualifying wages paid during leave.
70% Wage Replacement: Exceeds the 50% baseline by 20 percentage points. The credit rate increases by 5.0% (20 * 0.25 percentage points), resulting in an applicable percentage of 17.5%.
100% Wage Replacement (Full Pay): Exceeds the 50% baseline by 50 percentage points. The credit rate increases by 12.5% (50 * 0.25 percentage points), hitting the maximum statutory cap of 25.0%.

Employee-Level Limitations and Caps

The wage method incorporates strict caps to prevent excessive claims and limit the credit’s application to standard qualifying periods:

Individual Wage Rate Limitation: Under I.R.C. § 45S(b)(1), the wages taken into account with respect to any employee for any taxable year cannot exceed the product of the employee’s “normal hourly wage rate” for actual services performed and the number of hours for which family and medical leave is taken. For salaried or non-hourly employees, I.R.C. § 45S(b)(2) requires that the employee’s compensation be prorated to an hourly wage rate under regulations established by the Secretary.
Maximum Annual Leave Cap: Under I.R.C. § 45S(b)(3), the total amount of family and medical leave that may be taken into account with respect to any qualifying employee for any taxable year is strictly limited to 12 weeks.
Qualifying Purposes of Leave: Pursuant to I.R.C. § 45S(e)(1), family and medical leave is defined by cross-reference to section 102(a)(1)(A)-(E) or 102(a)(3) of the Family and Medical Leave Act of 1993 (FMLA). Crucially, general paid leave provided as vacation leave, personal leave, or general medical or sick leave does not qualify unless it is specifically designated for one or more of these FMLA purposes. Under I.R.C. § 45S(e)(2), such non-specific general leave is explicitly excluded from the definition of family and medical leave.

The Premium Method and the Shift to Premium-Based Calculations

The OBBBA expanded Section 45S by introducing the “premium method” as an alternative calculation mechanism. Under the premium method, pursuant to I.R.C. § 45S(a)(1)(B), an employer who “maintains an insurance policy with regard to the provision of paid family and medical leave” during the taxable year may elect to calculate the credit based on the “premiums paid or incurred by the employer” with respect to that policy during the taxable year.

A critical statutory distinction of the premium method is contained in the newly enacted I.R.C. § 45S(a)(3), which provides that:

“the determination of the rate of payment under the premium method is made without regard to whether any qualifying employees were on family and medical leave during the taxable year.”

This represents a significant administrative simplification. Unlike the wage method, which requires rigorous tracking of individual leave instances, regular wage rate computations, and concurrent FUTA wage payments, the premium method focuses on the commercial insurance premiums paid or incurred by the employer, irrespective of whether any employee actually utilized the leave during that taxable year.

Clarifying “Creditable Coverage” and Premium Exclusions

Notice 2026-28 establishes that baseline eligibility under the premium method remains anchored to the standards of the wage method. In Q&A-1, the IRS clarifies:

“The determination of whether an employer is eligible to claim the credit and the amount of the credit under the premium method is based on whether and the extent to which the premium funds a benefit for which a credit would be available under the wage method.”

Under this framework, a credit is only permissible for premiums that fund “creditable coverage”. The Notice reinforces this boundary by stating:

“If any portion of the premium provides funding for leave that would not be eligible for credit under the wage method, that portion of the premium is not eligible for credit under the premium method.”

Notice 2026-28 delineates four specific categories of coverage that fail to constitute “creditable coverage” and are therefore excluded from the premium-based credit calculation:

Non-Qualifying Leave Types: Under Q&A-2, a premium is not paid or incurred for creditable coverage if it provides coverage for leave “that would not be paid family or medical leave as defined in section 45S(e)”. For example, short-term disability or general sick leave policies that do not meet the precise definition of family and medical leave under I.R.C. § 45S(e) are excluded.
Non-Qualifying Employees: Under Q&A-3, a premium is not for creditable coverage if it is for “coverage with respect to leave that would be payable to an individual who is not a qualifying employee within the meaning of section 45S(d) at the time the premium is paid or incurred”. This requires employers to closely monitor employee status, such as whether an employee has met the required employment duration or is customarily employed for at least 20 hours per week.
State or Local Mandated Leave: Under Q&A-4, a premium is not for creditable coverage if it is for “coverage with respect to leave that is required by state or local law or paid for by a state or local government”.
Non-Wage Benefits: Under Q&A-5, a premium is not for creditable coverage if it is for “coverage that provides a benefit that would not constitute wages as defined in section 45S(g)”. The IRS refers taxpayers to Notice 2018-71, Q&A-24, Example 2, for examples of employee compensation that do not constitute qualifying FUTA wages.

The Allocation of Blended Premiums

Recognizing that many commercial insurance products do not perfectly isolate qualifying family and medical leave for qualifying employees, Notice 2026-28 addresses the concept of a “blended premium”. Under Q&A-6, a blended premium is defined as one paid for an insurance policy that provides “both creditable coverage and noncreditable coverage”. The Notice explains:

“A premium is a blended premium if, for example, it is for coverage that provides both qualifying paid family and medical leave and other types of leave, or coverage for qualifying employees and nonqualifying employees.”

When faced with a blended premium, the employer must allocate the premium between the creditable and noncreditable portions. Notice 2026-28 does not mandate a singular allocation formula, but instead provides that a blended premium:

“may be allocated using any reasonable method that is consistent with the policy terms and supported by contemporaneous records.”

To meet the standard of “reasonable,” the allocation method must satisfy three distinct administrative criteria:

It must incorporate objective criteria.
It must be applied consistently throughout the taxable year.
It must be applied consistently to all persons treated as a single employer under the aggregation rules of I.R.C. § 45S(c)(3).

Electing Between Methods and the Double-Dipping Prohibition

Notice 2026-28 confirms that the wage method and the premium method are not mutually exclusive across an employer’s entire benefit program. Under Q&A-7, an employer may utilize both the wage method and the premium method for different leave benefits, “provided that both the premium and the wage credit are not claimed as to a particular instance of leave”.

To prevent double-dipping, the IRS states:

“an employer may not use the wage method to claim a credit for wages paid to the extent that the employer claims a credit using the premium method for creditable coverage that funds such benefits (or vice versa).”

For instance, if an employer pays a premium for creditable coverage and claims a credit under the premium method, they cannot also claim a credit under the wage method for the benefits funded by that premium (whether through insurance reimbursement or direct payment).

However, the Notice permits a coordinated approach for split-funding arrangements:

“In contrast, if the benefits paid during that instance of leave are partially funded by the premium and partially funded from the employer’s general assets, the wage credit may be claimed for the portion funded from the employer’s general assets and the premium credit may be claimed for the portion funded by the premium.”

Key Amendments to Aggregation and Employee Qualification Rules

The OBBBA introduced other structural changes to I.R.C. § 45S that are heavily intertwined with the application of the credit:

Modification of Aggregation Rules

Under prior law, I.R.C. § 45S(c)(3) provided that all persons treated as a single employer under I.R.C. § 52(a) or (b) were treated as a single taxpayer. The OBBBA amended I.R.C. § 45S(c)(3) to align with the more common controlled group rules of I.R.C. § 414(b) and (c).

Furthermore, the amendment introduces a new relief provision: an exception to the aggregation rules is available for any person who “establishes to the satisfaction of the Secretary that the person has a substantial and legitimate business reason for failing to provide a written policy that satisfies the requirements of section 45S(c)(1) or (c)(2)”.

Interaction with State-Mandated Leave

Under the amended I.R.C. § 45S(c)(4), leave required by state or local law, or paid for by state or local governments, is now “taken into account for purposes of determining the amount of paid family and medical leave provided by the employer for purposes of determining whether the employer is an ‘eligible employer’”. This means state-mandated leave can help an employer clear the hurdle of being an “eligible employer” (such as satisfying the minimum leave duration and rate requirements). However, the statute maintains a strict wall regarding the credit calculation itself: “such leave continues not to be taken into account for purposes of calculating the amount of the credit under section 45S(a)”. Under Q&A-4, this same restriction applies to the premium method, meaning any premium portion funding state-mandated leave is noncreditable.

Qualification Thresholds for Employees

Under the revised I.R.C. § 45S(d), the definition of a “qualifying employee” is restricted to employees “customarily employed for not less than 20 hours per week”. Additionally, the OBBBA grants employers the flexibility to “elect to include employees after a six-month period (rather than a one-year period) of employment”.

Deduction Disallowance Under Section 280C(a)

A critical compliance detail for practitioners preparing Form 3800 and tax returns is the coordination with the deduction disallowance rules. The OBBBA amended I.R.C. § 280C(a) to ensure that employers do not receive a double benefit (a tax deduction and a tax credit) for the same expenditure.

Under the amended I.R.C. § 280C(a), “no deduction shall be allowed for that portion of the premiums paid or incurred for the taxable year which is equal to that portion of the paid family and medical leave credit which is determined for the taxable year under section 45S(a)(1)(B)”. This mirrors the existing rule under I.R.C. § 280C(a) that denies a deduction for wages or salaries equal to the credit determined under the wage method of I.R.C. § 45S(a)(1)(A).

Reliance, Request for Comments, and Future Regulations

The Treasury Department and the IRS plan to publish proposed regulations under I.R.C. § 45S that will incorporate the guidance of Notice 2026-28. When finalized, the proposed regulations are expected to apply prospectively to wages and insurance premiums paid or incurred after their issuance.

In the interim, the IRS has provided taxpayers with administrative reliance:

“Taxpayers may rely on the guidance contained in this notice for taxable years beginning after December 31, 2025, and before the issuance of the proposed regulations.”

To assist in the development of the forthcoming regulations, the IRS has requested written comments on all aspects of the notice by October 16, 2026. Taxpayers may submit comments electronically via the Federal eRulemaking Portal at www.regulations.gov under docket IRS-2026-0496. The IRS is particularly seeking feedback on:

The specific factors that may be utilized to allocate a blended premium, as well as methods to support and substantiate those allocations.
The application of the premium method to voluntary programs facilitated by a state but administered by private insurance companies under I.R.C. § 45S(a)(1)(B) and § 45S(c)(4).
What constitutes a “substantial and legitimate business reason” under I.R.C. § 45S(c)(3) for failing to provide a written policy satisfying the statutory requirements.

Technical Conclusion

Notice 2026-28 represents a significant step forward in clarifying the mechanical application of the new, permanent premium method under I.R.C. § 45S while retaining baseline consistency with the statutory wage method. While the premium method offers substantial administrative relief by removing the need to track specific employee leaves, it introduces complex allocation and substantiation requirements for employers utilizing blended commercial insurance policies. Tax practitioners must ensure that contemporaneous records support any allocation methodologies, and that the matching deduction disallowances under I.R.C. § 280C(a) are properly applied on the employer’s tax return.

Prepared with assistance from Google Notebook.