Read the current rule before pricing the policy
An employer considering paid family and medical leave insurance should ask which portion of the premium can support the federal employer credit. The answer does not follow automatically from the policy’s marketing name. A bundled product may cover qualifying leave, other leave, employees who do not meet the credit rules, and benefits required by state law. Obtain the actual coverage terms and census before treating the annual premium as one credit base.
The 2025 law made section 45S permanent and added a premium-based method beginning in 2026. Notice 2026-28 explains the new method and blended-premium allocations. Some older IRS FAQs still describe the prior expiration date and wage-only framework, with an express warning that they have not incorporated the changes. Use the current statute and notice for a 2026 decision rather than assuming the credit expired or that every paid premium qualifies.
Establish employer and employee eligibility first
The credit retains requirements concerning a qualifying written policy, covered leave, wage replacement, and qualifying employees. The amended rules include an hours condition and an option concerning the minimum employment period. Prior-year compensation also matters. Have the advisor review the actual census and policy together. An insurance carrier’s willingness to sell coverage does not establish the employer’s tax eligibility or identify which insured people belong in the creditable pool.
Create a census reconciliation showing employee identifier, customary hours, service period, relevant prior-year compensation, coverage dates, and reviewed qualification. Keep sensitive medical information outside the ordinary finance worksheet. The tax team generally needs eligibility and payment support, not an unrestricted circulation of clinical records. Assign a process for updating the census when new employees enter coverage or another entity joins the ownership group.
Under the amended statute, qualifying employees must customarily work at least 20 hours per week; the employer can elect the six-month service period instead of the ordinary one-year period. The policy must generally provide at least two weeks of qualifying annual leave for eligible full-time employees, proportionate leave for part-time employees, and at least 50% wage replacement. Verify the applicable prior-year compensation threshold separately.
Allocate the premium using objective evidence
Assume a hypothetical employer pays forty thousand dollars for a blended leave policy. A supported, consistently applied allocation identifies twenty-six thousand dollars for creditable coverage and fourteen thousand dollars for noncreditable coverage. Assume the applicable credit percentage is twenty-five percent under the policy’s reviewed replacement terms and all other conditions are met. The preliminary premium-method credit is six thousand five hundred dollars, not ten thousand dollars on the full invoice.
If the entire premium is otherwise deductible and the six-thousand-five-hundred-dollar credit requires an equal deduction reduction, the remaining deduction is thirty-three thousand five hundred dollars. At an assumed twenty-one-percent tax rate, that deduction has a simplified value of seven thousand thirty-five dollars, before credit limitations and other interactions. These figures are planning assumptions, not a carrier quote or an eligibility ruling. The example shows why the deduction adjustment must accompany the credit in the cash model.
Notice 2026-28 permits a reasonable blended-premium allocation supported by contemporaneous records and objective criteria, consistently applied for the year and the relevant employer group. Ask the carrier for the data needed to support the chosen method. A percentage selected because it yields a desired credit is not an evidence-based allocation. Preserve the method, inputs, policy version, and any midyear adjustment with the tax workpapers.
Prevent overlap between insurance and wage credits
The notice allows use of different methods for different leave, but it prohibits claiming both methods for the same funded benefit. If the business claims a premium credit for coverage that funds an employee’s leave payment, it cannot also claim the wage credit on that insured payment. Where the employer funds a separate portion from its own assets, the allocation needs to identify the two funding sources specifically.
Build a leave-payment register connecting the benefit period, payment, insurer reimbursement, employer-funded amount, and selected credit treatment. State or local mandated or government-paid leave has special treatment: it can matter to employer eligibility under the amended rules while remaining excluded from the credit calculation as applicable. Do not copy the full payroll leave code into the credit worksheet without separating that coverage and funding.
Review the result before renewal and filing
The premium method can apply without a qualifying employee actually taking leave during the year, subject to the statutory and notice requirements. That feature changes how a business may evaluate insurance, but it does not eliminate the need for a qualifying policy and supported premium allocation. Compare the program’s total cost and benefits rather than selecting coverage solely for the largest projected credit.
At year-end, reconcile premiums, refunds, coverage changes, employee eligibility, wage-method amounts, and deduction reductions. Use the applicable Form 8994 instructions and preserve the method election and support. Before renewing, review whether ownership, state requirements, policy terms, or the census changed the allocation. A reliable file should allow the next preparer to trace each credit dollar to creditable coverage without counting an insurer-funded wage payment a second time.
Sources & further reading
Consult the original guidance and its effective dates. These references support the educational discussion; their application depends on the specific facts.