IRC Section 45S Paid Family Leave Tax Credit: What Small Employers Must Do Under IRS Notice 2026-28

August 6, 2026

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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Obama Offers Grants To States To Boost Paid Leave Availability With State Grants

May 6, 2016

Employers concerned about Obama Administration efforts to expand existing unpaid family and medical leave requirements of the Family and Medical Leave Act to require paid family and medical leave also need to watch out for expanding state paid leave mandates as well as the much more widely recognized efforts by President Obama to impose federal paid leave requirements on employers.

Currently, the unpaid family and medical leave mandates of the Family & Medical Leave Act (FMLA) applicable to employers with 50 or more employees primarily define the obligation of private sector employers to provide family or medical leave.

As part of the Obama’s Administration’s efforts to fulfill President Obama’s campaign promise to expand the availability of paid family and medical leave before President Obama leaves office in January, 2016 in the face of continuing Congressional roadblocks to its efforts to enact a federal paid leave mandate, the Obama Administration is offering grants to help states develop paid family and medical leave laws and programs in their states.

On May 5. 2016, Department of Labor Secretary Thomas Perez announced the Department’s Woman’s Bureau is making available $1 million in grant funds for use in helping states, U.S. territories and possessions, counties and cities with at least 50,000 residents, and federally recognized Indian/Native American tribes with a population of at least 10,000 to fund the cost of developing and implementing paid family and medical leave programs at a roundtable discussion hosted to promote the Administration’s paid family and medical leave agenda with Nestlé, Spotify, and certain other employers.

The third year that the Department has offered such grants, the 2016 grant requirements and procedures are set forth in Woman’s Bureau Funding Opportunity Announcement.  In furtherance of its efforts to promote interest by qualified government or other entities, the Labor Department also has announced that the Department of Labor’s Employment and Training Administration, along with the Women’s Bureau, will host a Prospective Applicant WebEx webinar on Thursday, May 12, at 2:00 p.m. EDT to provide interested entities with an opportunity to ask questions about the grant opportunity during the webinar. Interested prospective applicants must register for the webinar in advance here. 

Alongside monitoring emerging proposals to enact federal or state paid leave legislation, employers and others concerned with paid leave mandates also need to keep a close eye on the actions that President Obama and government agencies take to require paid leave through executive action, government contracting mandates or other non-legislative efforts.  President Obama already has used his executive powers to expand paid family and medical leave rights for federal government workers, to add paid leave mandates to federal contracting regulations and contracts applicable to government contractors, and otherwise

Even for the millions of employers that already voluntarily provide paid leave, the enactment of additional federal or state paid leave mandates inevitability will limit employer flexibility to structure its compensation and other leave and staffing as well as substantially increase the financial, regulatory and other obligations and risks of employers.   For this reason, employers and others concerned about potential adverse effects of becoming subject to new or expanded paid family, medical or other leave requirements should carefully monitor both federal and state legislative and regulatory enforcement  proposals and other activities, take into account these developments in their short and long range human resources budget, compensation and other business and human resources planning, and provide feedback and input to federal and state legislators and regulators about existing and proposed leave mandates.  As part of their efforts to monitor and respond to state law developments, employers and others interested in more information about the Funding Opportunity Announcement can learn more here.

About The Author

A practicing attorney and Managing Shareholder of Cynthia Marcotte Stamer, P.C.,  Ms. Stamer’s more than 28 years’ of leading edge work as an practicing attorney, author, lecturer and industry and policy thought leader have resulted in her recognition as a “Top” attorney in employee benefits, labor and employment and health care law.

A Fellow in the American College of Employee Benefit Counsel, the American Bar Foundation and the Texas Bar Foundation, Cynthia Marcotte Stamer is a noted Texas-based management lawyer and consultant, author, lecturer and policy advocate, recognized as among the “Top Rated Labor & Employment Lawyers in Texas” by LexisNexis® Martindale-Hubbell® and as among the “Best Lawyers In Dallas” for her work in the field of “Tax: Erisa & Employee Benefits” and “Health Care” by D Magazine.

Ms. Stamer’s legal and management consulting work throughout her career has focused on helping organizations and their management use the law and process to manage people, process, compliance, operations and risk. Highly valued for her rare ability to find pragmatic client-centric solutions by combining her detailed legal and operational knowledge and experience with her talent for creative problem-solving, Ms. Stamer helps public and private, domestic and international businesses, governments, and other organizations and their leaders manage their employees, vendors and suppliers, and other workforce members, customers and other’ performance, compliance, compensation and benefits, operations, risks and liabilities, as well as to prevent, stabilize and cleanup workforce and other legal and operational crises large and small that arise in the course of operations.

Board Certified in Labor & Employment Law by the Texas Board of Legal Specialization, Ms. Stamer helps management manage. Ms. Stamer works with businesses and their management, employee benefit plans, governments and other organizations deal with all aspects of human resources and workforce management operations and compliance. She supports her clients both on a real time, “on demand” basis and with longer term basis to deal with daily performance management and operations, emerging crises, strategic planning, process improvement and change management, investigations, defending litigation, audits, investigations or other enforcement challenges, government affairs and public policy.  Well-known for her extensive work with health care, insurance and other highly regulated entities on corporate compliance, internal controls and risk management, her clients range from highly regulated entities like employers, contractors and their employee benefit plans, their sponsors, management, administrators, insurers, fiduciaries and advisors, technology and data service providers, health care, managed care and insurance, financial services, government contractors and government entities, as well as retail, manufacturing, construction, consulting and a host of other domestic and international businesses of all types and sizes.  Common engagements include internal and external workforce hiring, management, training, performance management, compliance and administration, discipline and termination, and other aspects of workforce management including employment and outsourced services contracting and enforcement, sentencing guidelines and other compliance plan, policy and program development, administration, and defense, performance management, wage and hour and other compensation and benefits, reengineering and other change management, internal controls, compliance and risk management, communications and training, worker classification, tax and payroll, investigations, crisis preparedness and response, government relations, safety, government contracting and audits, litigation and other enforcement, and other concerns.

A Fellow in the American College of Employee Benefit Counsel, Ms. Stamer uses her deep and highly specialized knowledge and experience to help employers and other employee benefit plan sponsors; health, pension and other employee benefit plans, their fiduciaries, administrators and service providers, insurers, and others design legally compliant, effective compensation, health and other welfare benefit and insurance, severance, pension and deferred compensation, private exchanges, cafeteria plan and other employee benefit, fringe benefit, salary and hourly compensation, bonus and other incentive compensation and related programs, products and arrangements. She is particularly recognized for her leading edge work, thought leadership and knowledgeable advice and representation on the design, documentation, administration, regulation and defense of a diverse range of self-insured and insured health and welfare benefit plans including private exchange and other health benefit choices, health care reimbursement and other “defined contribution” limited benefit, 24-hour and other occupational and non-occupational injury and accident, ex-patriate and medical tourism, onsite medical, wellness and other medical plans and insurance benefit programs as well as a diverse range of other qualified and nonqualified retirement and deferred compensation, severance and other employee benefits and compensation, insurance and savings plans, programs, products, services and activities. As a key element of this work, Ms. Stamer works closely with employer and other plan sponsors, insurance and financial services companies, plan fiduciaries, administrators, and vendors and others to design, administer and defend effective legally defensible employee benefits and compensation practices, programs, products and technology. She also continuously helps employers, insurers, administrative and other service providers, their officers, directors and others to manage fiduciary and other risks of sponsorship or involvement with these and other benefit and compensation arrangements and to defend and mitigate liability and other risks from benefit and liability claims including fiduciary, benefit and other claims, audits, and litigation brought by the Labor Department, IRS, HHS, participants and beneficiaries, service providers, and others.  She also assists debtors, creditors, bankruptcy trustees and others assess, manage and resolve labor and employment, employee benefits and insurance, payroll and other compensation related concerns arising from reductions in force or other terminations, mergers, acquisitions, bankruptcies and other business transactions including extensive experience with multiple, high-profile large scale bankruptcies resulting in ERISA, tax, corporate and securities and other litigation or enforcement actions.  In the course of this work, Ms. Stamer has accumulated an impressive resume of experience advising and representing clients on HIPAA and other privacy and data security concerns. The scribe for the American Bar Association (ABA) Joint Committee on Employee Benefits annual agency meeting with the Department of Health & Human Services Office of Civil Rights for several years, Ms. Stamer has worked extensively with health plans, health care providers, health care clearinghouses, their business associates, employer and other sponsors, banks and other financial institutions, and others on risk management and compliance with HIPAA and other information privacy and data security rules, investigating and responding to known or suspected breaches, defending investigations or other actions by plaintiffs, OCR and other federal or state agencies, reporting known or suspected violations, business associate and other contracting, commenting or obtaining other clarification of guidance, training and enforcement, and a host of other related concerns. Her clients include public and private health plans, health insurers, health care providers, banking, technology and other vendors, and others. Beyond advising these and other clients on privacy and data security compliance, risk management, investigations and data breach response and remediation, Ms. Stamer also advises and represents clients on OCR and other HHS, Department of Labor, IRS, FTC, DOD and other health care industry investigation, enforcement and other compliance, public policy, regulatory, staffing, and other operations and risk management concerns. She also is the author of numerous highly acclaimed publications, workshops and tools for HIPAA or other compliance including training programs on Privacy & The Pandemic for the Association of State & Territorial Health Plans, as well as HIPAA, FACTA, PCI, medical confidentiality, insurance confidentiality and other privacy and data security compliance and risk management for Los Angeles County Health Department, ISSA, HIMMS, the ABA, SHRM, schools, medical societies, government and private health care and health plan organizations, their business associates, trade associations and others.

Ms. Stamer also is deeply involved in helping to influence the Affordable Care Act and other health care, pension, social security, workforce, insurance and other policies critical to the workforce, benefits, and compensation practices and other key aspects of a broad range of businesses and their operations. She both helps her clients respond to and resolve emerging regulations and laws, government investigations and enforcement actions and helps them shape the rules through dealings with Congress and other legislatures, regulators and government officials domestically and internationally.  A former lead consultant to the Government of Bolivia on its Social Security reform law and most recognized for her leadership on U.S. health and pension, wage and hour, tax, education and immigration policy reform, Ms. Stamer works with U.S. and foreign businesses, governments, trade associations, and others on workforce, social security and severance, health care, immigration, privacy and data security, tax, ethics and other laws and regulations. Founder and Executive Director of the Coalition for Responsible Healthcare Policy and its PROJECT COPE: the Coalition on Patient Empowerment and a Fellow in the American Bar Foundation and State Bar of Texas, Ms. Stamer annually leads the Joint Committee on Employee Benefits (JCEB) HHS Office of Civil Rights agency meeting and other JCEB agency meetings.  She also works as a policy advisor and advocate to many business, professional and civic organizations.

Author of the thousands of publications and workshops these and other employment, employee benefits, health care, insurance, workforce and other management matters, Ms. Stamer also is a highly sought out speaker and industry thought leader known for empowering audiences and readers. Ms. Stamer’s insights on employee benefits, insurance, health care and workforce matters in Atlantic Information Services, The Bureau of National Affairs (BNA), InsuranceThoughtLeaders.com, Benefits Magazine, Employee Benefit News, Texas CEO Magazine, HealthLeaders, Modern Healthcare, Business Insurance, Employee Benefits News, World At Work, Benefits Magazine, the Wall Street Journal, the Dallas Morning News, the Dallas Business Journal, the Houston Business Journal, and many other publications. She also has served as an Editorial Advisory Board Member for human resources, employee benefit and other management focused publications of BNA, HR.com, Employee Benefit News, InsuranceThoughtLeadership.com and many other prominent publications. Ms. Stamer also regularly serves on the faculty and planning committees for symposia of LexisNexis, the American Bar Association, ALIABA, the Society of Employee Benefits Administrators, the American Law Institute, ISSA, HIMMs, and many other prominent educational and training organizations and conducts training and speaks on these and other management, compliance and public policy concerns.

Beyond these involvements, Ms. Stamer also is active in the leadership of a broad range of other professional and civic organizations. For instance, Ms. Stamer presently serves on an American Bar Association (ABA) Joint Committee on Employee Benefits Council representative; Vice President of the North Texas Healthcare Compliance Professionals Association; Immediate Past Chair of the ABA RPTE Employee Benefits & Other Compensation Committee, its current Welfare Benefit Plans Committee Co-Chair, on its Substantive Groups & Committee and its incoming Defined Contribution Plan Committee Chair and Practice Management Vice Chair; Past Chair of the ABA Health Law Section Managed Care & Insurance Interest Group and a current member of its Healthcare Coordinating Council; current Vice Chair of the ABA TIPS Employee Benefit Committee; the former Coordinator and a Vice-Chair of the Gulf Coast TEGE Council TE Division; on the Advisory Boards of InsuranceThoughtLeadership.com, HR.com, Employee Benefit News, and many other publications. She also previously served as a founding Board Member and President of the Alliance for Healthcare Excellence, as a Board Member and Board Compliance Committee Chair for the National Kidney Foundation of North Texas; the Board President of the early childhood development intervention agency, The Richardson Development Center for Children; Chair of the Dallas Bar Association Employee Benefits & Executive Compensation Committee; a member of the Board of Directors of the Southwest Benefits Association. For additional information about Ms. Stamer, see here or contact Ms. Stamer directly by email here or by telephone at (469) 767-8872.

About Solutions Law Press, Inc.™

Solutions Law Press, Inc.™ provides human resources and employee benefit and other business risk management, legal compliance, management effectiveness and other coaching, tools and other resources, training and education on leadership, governance, human resources, employee benefits, data security and privacy, insurance, health care and other key compliance, risk management, internal controls and operational concerns. If you find this of interest, you also may be interested reviewing other Solutions Law Press, Inc.™ resources at www.solutionslawpress.com such as:

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©2016 Cynthia Marcotte Stamer. Non-exclusive right to republish granted to Solutions Law Press. All other rights reserved.