Employers with fewer than 25 employees interested in qualifying for the paid family and medical leave (“PFML”) under Internal Revenue Code Section 45S should review and respond to (“IRS”) guidance in Notice 2026-28 (the “Notice”).

OVERVIEW

The Notice released August 5, 2026 provides comprehensive guidance on amended requirements for the employer credit for paid family and medical leave (“PFML”) under Internal Revenue Code Section 45S.

Internal Revenue Code Section 45S, enacted as part of the Patient Protection and Affordable Care Act of 2010 (the “ACA”) provides a tax credit to assist small employers in affording health insurance coverage for their employees. The credit applies to employers with 25 or fewer full-time equivalent employees whose average annual wages do not exceed $55,000 (adjusted annually for inflation). For qualifying employers that maintain employee participation and coverage for at least 60% of their workforce, the credit covers up to 50% of qualified health plan premiums paid for employees during tax years 2010–2013, and 35% thereafter. The credit was designed to incentivize small business participation in the health insurance marketplace by offsetting a significant portion of insurance costs.

The credit’s structure reflects a phase-out mechanism: the credit percentage decreases for employers with more employees or higher average wages, meaning it is most generous for businesses meeting the strictest criteria. Originally, the credit was available for 35% of premiums, but Congress increased this to 50% for the first years following the ACA’s enactment to provide immediate relief. While Section 45S has remained relatively stable in its core mechanics, it has been subject to annual inflation adjustments to the wage threshold and remains one of the primary federal tools for promoting insurance coverage among the small-employer population.

The statutory amendments, enacted by the One, Big, Beautiful Bill Act (Public Law 119-21, effective July 4, 2025), modify credit eligibility, rate structure, and substantiation requirements for employers offering qualifying paid leave programs.

WHAT’S NEW: SECTION 45S CREDIT AMENDMENTS

The Notice provides comprehensive guidance about changes to the rules enacted by the Big Beautiful Bill, including the following:

Credit Structure & Eligibility

The Big Beautiful Bill amended Internal Revenue Code Section 45S’ rules on employer qualification for credit for qualified paid family leave.

The Section 45S credit applies to eligible employers who provide qualifying paid family and medical leave to employees. Qualifying leave includes paid family leave, paid sick leave, and paid medical leave as defined under the Family and Medical Leave Act (“FMLA”) and its state-law equivalents. The credit is calculated as a percentage of wages paid or premiums paid or incurred with respect to qualifying employees for periods of qualifying leave.

Notice 2026-28 clarifies the following elements:

• Wages paid during qualifying leave periods must be substantiated through contemporaneous time and attendance records, payroll documentation, and employer health and welfare plan records.
• Premium costs incurred for continuation of health insurance coverage during leave qualify for credit inclusion.
• The credit rate and wage-limitation thresholds established by the amendments apply retroactively to tax years beginning on or after July 4, 2025.

Substantiation & Documentation Requirements

Notice 2026-28 imposes detailed substantiation obligations on employers claiming the credit:

• Employees must be identified by SSN in payroll records linking leave periods to wage payments;
• Employers must maintain contemporaneous written policies documenting the PFML program, eligibility criteria, and accrual/payout procedures; and
• Documentation must demonstrate compliance with applicable FMLA federal requirements and state leave law counterparts.

KEY COMPLIANCE CONSIDERATIONS

Employers desiring to qualify for the credit must negotiate several compliance traps. Key among these are the following:

FMLA & State Leave Law Compliance Nexus

The Section 45S credit is tethered to compliance with federal FMLA regulations. Employers with FMLA violations may face credit disallowance during audit. Counsel should verify that leave-policy definitions (qualifying leave, accrual, payment, continuation of benefits) align with both the FMLA and applicable state counterparts (e.g., Texas paid family leave, New York paid family leave, California paid leave programs).

Audit Risk & Substantiation Exposure

Section 45S is a targeted employment credit and subject to IRS audit scrutiny. Failure to maintain contemporaneous wage documentation, leave-hour records, or written policies will result in credit disallowance. Counsel should establish controls ensuring that payroll systems and HR records remain audit-ready and segregate PFML wages for quick access during examination.

Interaction with Other Credits & Wage Limitations

Employers claiming multiple employment credits (Work Opportunity Tax Credit, Research Credit, etc.) must ensure wage-allocation rules do not result in double-counting under IRC § 280C. Counsel should coordinate with tax planning to confirm that basis reductions and wage allocations are applied consistently across all credits.

ACTION ITEMS

Employers desiring to claim the credit and their FMLA administrators should move promptly to respond to the guidance including the following:

Plan Sponsors & HR Leadership

Among other things, small employers desiring to claim the credit should:

• Verify compliance with applicable state family leave requirements.
• Conduct immediate audit of existing PFML policies to confirm alignment with amended Section 45S eligibility and credit-rate thresholds. Identify any gaps in documentation (employee eligibility, leave periods, wage substantiation).
• Update (or adopt) written policies defining their policies.
• Review health insurance eligibility and other policies for compliance with requirements.
• Verify that payroll systems capture and link paid leave usage (hours/days) to wage records for each employee.
• Ensure retroactive compliance for claims spanning the July 4, 2025 effective date.
• Document written PFML policies, accrual schedules, and payout procedures. Confirm compliance with federal FMLA regulations (29 C.F.R. Part 825) and applicable state paid leave statutes (e.g., Tex. Labor Code § 81.001 et seq., Texas Paid Family Leave).
• Coordinate with benefits counsel and tax advisors to determine credit-claiming strategy: whether to claim the credit on Form 8994 (“IRS Form”) or amend prior returns if PFML programs were in effect before Notice 2026-28’s release.

Third-Party Administrators & Payroll Processors

Third-Party Administrators (TPAs) & payroll processors working with small employers desiring to claim the credit play an important role. To support their clients, they should:

• Update payroll and HRIS reporting modules to segregate and report PFML-related wage activity separately, with clear audit trails linking leave periods to qualifying employee lists.
• Provide clients with Notice 2026-28 summaries and substantiation guidance. Offer reporting deliverables (e.g., Section 45S wage schedules) that support credit claims and IRS audit defense.
• Develop substantiation checklists for clients to ensure contemporaneous documentation of all leave periods, wage calculations, and premium payments tied to each employee’s Section 45S credit claim.
• Update their services agreements.

For Help or More Information

If you need help or have questions about these or other workforce, employee benefits or compensation concerns, contact the author of this update, Cynthia Marcotte Stamer. For more information about these concerns or Ms. Stamer, contact Ms. Stamer via e-mail or via telephone at (214) 452 -8297.

Ms. Stamer is an a Martindale-Hubble “AV-Preeminent” (Top 1%) attorney and advisor Board Certified in Labor and Employment Law by the Texas Board of Legal Specialization and Fellow in the American College of Employee Benefits Counsel. She is peer celebrated as “Top Rated Lawyer” and “LEGAL LEADER™ “Top Rated Lawyer” and “Best Lawyer” for her work in ERISA & Employee Benefits Law, Health Care Law, Labor and Employment Law, and Business and Commercial Law.

Nationally recognized for her decades of leading-edge workforce, health and other employee benefits and insurance, compensation, regulatory affairs and compliance, and other management work, public policy leadership and advocacy, coaching, teachings, and publications, with decades of experience advising and assisting health, insurance, technology and other industry employers and employee benefit plan sponsors, fiduciaries and service providers to design, audit, and defend their employment, employee benefits, compensation and other workforce and performance related risk management,c ompliance and operations practices, including conducting audits and investigations, designing and updating compliance and risk management programs, responding to government investigations, conducting transaction, governance, and other due diligence, and assisting with other legal and operational compliance and risk management and legislative and regulatory affairs. She is available to assist your organization in assessing the impact of these developments and navigating the compliance and strategic steps that follow.

She also is the publisher of Solutions Law Press, Inc.® practitioner-focused compliance publications for employers, plan sponsors, HR professionals, health care, insurance, technology and data industry leaders, and legal counsel and risk management advisors.

Along with these activities, Ms. Stamer also has earned national recognition for her authorship of thousands of highly regarded works, presentations as a knowledgeable speaker, testimony and other input of regulators and legislators, and media interviews on health and other benefits, human resources and other workforce, health care, insurance, data privacy and security and other related concerns. 

For more information about Ms. Stamer, engaging her services or to speak, her work, credentials, experience and involvements, or other matters, see the About the Author page, her website at www.cynthiastamer.com, or contact Ms. Stamer via telephone at (214) 452-8297 or via e-mail here.

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