Treasury and the IRS issued Notice 2026-28 on August 5, 2026, addressing the permanently expanded Section 45S employer credit for paid family and medical leave (PFML). The Working Families Tax Cuts (WFTC), enacted as part of the One, Big, Beautiful Bill, made the Section 45S credit permanent and expanded it in ways that meaningfully change the planning conversation with employer clients. Treasury Secretary Scott Bessent framed the expansion as removing the choice between “caring for a loved one and earning a paycheck.” IRS CEO Frank J. Bisignano credited the changes with making more employers eligible for the credit.
For tax pros advising employer clients, Notice 2026-28 is the first substantive administrative guidance on the expanded credit and should be read alongside the WFTC statutory text before any client claims the credit for tax year 2026.
Background: what Section 45S is
Section 45S was enacted by the Tax Cuts and Jobs Act of 2017 as a temporary general business tax credit under IRC Section 38. It provides employers with a credit equal to a specified percentage of wages paid to qualifying employees during periods of family and medical leave. The credit percentage starts at 12.5 percent of wages paid during leave (for employers paying 50 percent of an employee’s normal wages during leave) and increases by 0.25 percent for each percentage point by which the payment rate exceeds 50 percent, up to a maximum of 25 percent (when the employer pays 100 percent of normal wages during leave). The credit is available for up to 12 weeks of paid leave per employee per taxable year.
Before WFTC, the credit had been temporary and extended in a series of legislative packages. The permanence of the credit under WFTC removes that legislative uncertainty and makes it a durable component of employer benefit planning.
What WFTC changed
Three expansions matter for advisors:
Expanded eligibility for the employee count. Employers can now claim the credit for employees with six months of service (down from one year of service) and for part time employees who customarily work 20 hours or more per week (down from a higher threshold). This materially expands the pool of employees whose leave can generate credit.
Expanded coverage of what the credit applies to. Beginning in tax year 2026, employers can claim the credit for insurance premiums paid to provide PFML benefits, in addition to wages paid during leave. This is the “premium based method,” and it is new. Employers who fund PFML through an insured arrangement (rather than through direct wage continuation) now have a pathway to the credit that did not previously exist.
State and local mandate interaction. Employers can count leave provided under state or local paid leave mandates toward the eligibility for the federal credit. Importantly, mandated leave does not count toward the credit calculation itself. Practically: if a state or locality already requires paid leave, the underlying leave counts for whether the employer is treated as offering PFML, but the wages or premiums attributable to that mandated leave do not generate credit dollars.
What Notice 2026-28 actually addresses
Notice 2026-28 focuses on the new premium based method. Specifically, it addresses:
How the premium based method compares to the traditional wage based method.
How to allocate qualifying premiums between covered and non covered activity.
How to elect between the premium method and the wage method.
Forthcoming proposed regulations are expected to provide broader guidance addressing the full statutory text and comprehensive implementation of the WFTC amendments to Section 45S. Treasury and the IRS have requested comments on all aspects of the notice, with submission instructions in the notice itself.
Why this matters for tax pros
Six practice level takeaways for counsel and business tax advisors.
First, canvass the employer client base. The relaxed six month service threshold and the 20 hour part time threshold pull employees into eligibility who previously did not qualify. Any employer client with a written PFML policy in place (or considering one) should have a fresh Section 45S analysis run for the 2026 tax year. Employers who evaluated the credit under prior law and concluded it did not move the needle deserve a second look.
Second, understand the premium based method before advising which method to elect. Beginning in 2026, an employer that pays premiums for a PFML insurance policy can claim the credit based on those premiums rather than on direct wage payments during leave. The choice between methods will drive materially different credit calculations depending on the employer’s benefit design, the pricing of available insurance products, and the composition of the workforce. Notice 2026-28 provides the framework for that comparison, and counsel should walk through both methods for each employer client rather than defaulting to the historical wage based approach.
Third, tighten the written policy. Section 45S requires a written PFML policy that meets specific statutory requirements. The permanent expansion is an opportunity to update the policy to align with the new lower thresholds and to document the employer’s coverage of six month and 20 hour part time employees. A stale policy from 2020 does not automatically meet the current requirements.
Fourth, map the state law interaction carefully. Employer clients in California, New York, New Jersey, Massachusetts, Washington, and other states with paid leave mandates now have two moving pieces. The state mandated leave counts for federal credit eligibility purposes but is excluded from the credit calculation. Counsel should build a wage tracking framework that separately identifies wages (or premiums) attributable to mandated leave versus wages (or premiums) attributable to employer voluntary leave, because those two buckets are treated differently for the Section 45S computation.
Fifth, coordinate with payroll and benefits providers now. The premium based method requires the employer to track qualifying premiums with sufficient granularity to support the credit computation. Payroll systems, benefits administration platforms, and PFML insurance carriers should be engaged before the year end close so that the required data is captured in real time rather than reconstructed. Employers who wait until Form 8994 preparation season to build the data trail will find the premium based method harder to claim than it needs to be.
Sixth, watch for the proposed regulations. Notice 2026-28 is a starting point. The forthcoming proposed regulations are expected to address the broader statutory framework, including issues that the notice does not resolve. Counsel and clients should treat the notice as reliance guidance for tax year 2026 while planning for potential refinement in the proposed regulations. The comment window is open, and employer clients with fact patterns not cleanly addressed by the notice (for example, self insured PFML arrangements, professional employer organization structures, or multi state employers) should consider commenting.
A note on the legal posture
Section 45S is a general business credit under IRC Section 38, which means it is subject to the credit’s ordinary usage and carry rules. Unused credit generally carries back one year and forward 20 years, subject to the Section 38 tax liability limitation. Counsel structuring the credit into an employer’s overall tax planning should confirm that the anticipated credit can be absorbed against the employer’s tax liability in the applicable year, and should identify the carry positions for any excess.
THE TTR TAKE
Section 45S went from an on again off again temporary credit to a permanent tool with a lower eligibility floor and a brand new premium based pathway. For any tax pro advising employers with paid leave programs (or considering one), Notice 2026-28 is the starting document for the 2026 planning cycle. Canvass the client base, update the written policy, and get payroll aligned before year end.
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Direct link to the official Internal Revenue Service announcement.