The Paid Leave Tax Credit Just Became Permanent

For eight years, the Section 45S paid family and medical leave credit ran on a countdown clock. Congress created it as a temporary provision in the 2017 tax law, then extended it five separate times before it was set to expire. That uncertainty is over. The One Big Beautiful Bill Act made the credit permanent for tax years beginning in 2026, according to the IRS's updated Section 45S FAQs, and it rewrote how insured employers can claim it along the way. 

The permanence matters on its own. A benefits leader building a five-year paid leave strategy no longer has to model a scenario where the credit disappears mid-plan. But the bigger shift for 2026 is the new premium-based calculation method, and it changes who has a reason to claim this credit in the first place.

Under the original rules, you only earned the credit by paying wages to an employee actually on leave. No leave taken in a given year meant no credit, even if you maintained a paid leave policy all year long. That structure quietly excluded a large group of employers: those who purchase a commercial insurance policy to fund paid leave rather than self-funding it out of payroll.

OBBBA fixes that gap directly. Employers with an insurance policy for paid family and medical leave in force during the tax year can now elect to calculate the credit as the applicable percentage of premiums paid, instead of wages paid to employees on leave, according to KPMG's August 2025 report on the OBBBA changes to Section 45S. The credit applies even if no employee takes leave during the year, which means the premium itself becomes creditable, not just the payout.

The rate structure stays consistent between the wage method and the premium method.

One rule you should not overlook: the OBBBA aggregation provision treats all employers within the same controlled group as a single entity for purposes of this credit, with limited exceptions, per the same KPMG analysis. Multi-entity organizations, PEOs, and companies with several EINs under common ownership need to test eligibility at the group level, not the entity level, before assuming they qualify.

Why this reopens the door for insured employers specifically: self-funded paid leave programs have always had a natural way to document the credit, because wages paid during leave show up directly in payroll records. Insured programs never had that same paper trail, since the employer's cost is a premium, not a payroll line tied to a specific leave event. The premium method solves the documentation problem at the same time it solves the eligibility problem.

You do not need to overhaul your leave policy to benefit from this change. If your organization already carries a group PFML insurance policy, the premium method may be the more valuable election starting with the 2026 tax year, particularly if leave utilization runs lower than the policy's cost would suggest. Running both calculations, wage-based and premium-based, before filing is the only way to know which one actually produces the larger credit for your specific claim.

That comparison is exactly the kind of modeling that gets skipped when a tax credit program runs on manual spreadsheets. Our Incentives Navigator inside Ryze was built to run scenarios like this automatically, mapping credit value against your actual policy structure and headcount rather than a generic estimate. For organizations juggling this credit alongside WOTC, FICA, or other federal & state credit opportunities, keeping every calculation inside one dashboard beats reconciling five separate spreadsheets at filing time.

The credit's permanence also changes how it fits alongside state paid leave mandates. A growing number of states now require some form of paid family or medical leave, and employers operating in those states already pay into a state program, a private policy, or both. Section 45S does not disappear just because a state mandate exists, but the interaction between a state-required benefit and a federal credit is exactly the kind of detail that gets missed when a company treats this as a one-time filing question instead of an ongoing benefits decision.

Documentation discipline still matters even with a simpler premium calculation. Our recent breakdown of audit-proofing tax credit claims for 2026 covers the records the IRS expects to see behind a claim like this one, and a premium-based 45S claim is not exempt from that standard just because the math is more straightforward.

The credit's permanence removes the planning risk that came with a five-time-extended provision. The premium method removes the participation barrier that kept insured employers on the sidelines. Together, they turn Section 45S from a credit built for self-funded programs into one that works for however your organization actually pays for paid leave.

Employers that have not run the premium-method math against their current policy are leaving a comparison on the table, not just a credit. Create a free Ryze's Incentives Navigator account to help identify what your estimated credit could be.