Employers offering paid family and medical leave may have a new opportunity to reduce the cost of providing this increasingly important employee benefit.
The IRS and U.S. Treasury Department recently issued guidance providing additional clarity on the expanded federal tax credit available to employers that provide qualifying Paid Family and Medical Leave (PFML). The guidance explains how employers may take advantage of the permanently expanded credit beginning in 2026 and includes several changes designed to make the credit available to more employers.
A Significant Change for Employers
One of the most important changes is that employers may now be able to claim the tax credit for qualifying paid family and medical leave insurance premiums — not just wages paid directly to employees while they are on leave.
This is particularly significant for employers that provide paid leave benefits through an insurance program rather than self-funding wage replacement. Employers that previously assumed they did not qualify for the federal tax credit should take another look at their programs.
Beginning in 2026, qualifying employers may be eligible for a general business tax credit ranging from 12.5% to 25% of wages paid to qualifying employees for up to 12 weeks of family and medical leave during a taxable year. Alternatively, employers may be able to claim the credit for qualifying PFML insurance premiums.
Other Important Changes
The new guidance also provides clarification in several key areas:
- Expanded employee eligibility. Employers may claim the credit for qualifying employees who have completed at least six months of service. The expanded rules also address eligibility for part-time employees who customarily work at least 20 hours per week.
- State and local paid leave requirements. Leave provided under state or local mandates may help an employer satisfy certain eligibility requirements for the federal tax credit. However, amounts required under state or local law generally cannot be included when calculating the federal credit.
- Insured paid leave programs. Employers using insurance to fund paid family and medical leave may now have an additional avenue for qualifying for the credit.
What This Means for Employers
For California employers — and particularly employers operating in multiple states — the expanded credit provides another reason to review existing paid leave programs.
Employers should not assume that participation in a state-mandated paid leave program or the use of an insured PFML benefit automatically makes them ineligible for the federal tax credit. The interaction between federal, state and local leave requirements can be complicated, but the potential tax savings make a review worthwhile.
The federal Family and Medical Leave Act (FMLA) generally provides eligible employees with job-protected unpaid leave. Employers that go beyond these minimum requirements by providing paid family and medical leave may now have a greater opportunity to offset some of those costs through the federal tax credit.
JorgensenHR Recommendation
Employers offering paid family or medical leave should consider reviewing their current policies, insurance programs and leave administration practices with their HR, benefits and tax advisors to determine whether they may qualify for the expanded credit beginning in 2026.
This is also a good opportunity to make sure your paid leave policies coordinate properly with FMLA, California leave requirements, state disability and Paid Family Leave benefits, and any applicable local requirements.
JorgensenHR can assist employers in reviewing their leave policies and HR practices to help identify compliance gaps and ensure their programs are properly coordinated.
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