IRS Offers Guidance on Premium Method for Calculating the Sec. 45S Paid Family and Medical Leave Tax Credit

Prior to the OBBBA, employers calculated the Section 45S credit based on wages paid to employees on leave. The OBBBA created a new method that allows employers to calculate the credit based on premiums paid for insurance coverage to fund their paid leave obligations. Pursuant to IRS Notice 2026-28, employers can claim the credit using the premium method even if no employee has taken qualifying leave during the year. Premiums only qualify for the tax credit, however, if they fund a benefit that would have qualified under the wage method if the employee had actually taken leave (the IRS refers to this as "creditable coverage"). When insurance policies provide both creditable and non-creditable coverage, the employer must allocate the premium between the creditable and non-creditable portion of the "blended premium", using any reasonable method. That method must be applied consistently, be supported by contemporaneous records and use objective criteria. The IRS was also clear that employers may now use both the wage and premium method during the same tax year (for example, if a portion of the benefit is covered by insurance and a portion is paid out of the employer's general assets). However, no "double dipping" is permitted. Employers cannot claim the wage-based credit for the portion of the benefit funded by insurance if they used the premium method for that portion. For more information on the Section 45S paid family and medical leave credit, visit Tax Facts Online. Read More: Link to Q3512.