The Paid Leave Credit Is Permanent, and It Now Covers Insurance Premiums

The employer credit for paid family and medical leave has spent most of its existence on temporary extensions, expiring and being renewed every couple of years. That made it hard to build a benefit program around — nobody wants to design a policy that depends on a credit that might not exist next year.

The One Big Beautiful Bill Act made it permanent after 2025 and added a meaningful expansion.

What the credit does

Section 45S provides a general business credit to employers who pay employees while they are on family or medical leave. The credit ranges from 12.5% to 25% of wages paid during leave, depending on how much of the employee's normal wage the employer replaces.

At the minimum 50% wage replacement, the credit is 12.5% of the wages paid. The credit rate rises as the replacement rate rises, reaching 25% when the employer pays 100% of normal wages. Below 50% replacement, no credit is available.

There is a cap on the amount of leave that counts — generally twelve weeks per employee per year.

The new piece: insurance premiums

Previously, the credit applied only to wages the employer paid directly during leave. Employers who instead purchased paid family and medical leave insurance got nothing, even though they were funding the same benefit through a different mechanism.

The law now allows employers to claim the credit for a portion of premiums paid for paid family and medical leave insurance.

This matters most for small employers. Self-funding paid leave is difficult when you have fifteen employees — one extended leave is a serious cash event. Insurance spreads that risk, and it's often the only realistic way a small business can offer meaningful paid leave. Extending the credit to premiums removes a penalty that fell almost entirely on smaller employers.

The requirements

Several conditions have to be met, and they're specific.

A written policy. The employer must have a written policy providing qualifying employees at least two weeks of annual paid family and medical leave, prorated for part-time employees, at no less than 50% of normal wages. Informal practice doesn't qualify. The policy must exist in writing.

Coverage of qualifying employees. Employees generally must have been employed for at least one year and, for the prior year, must not have had compensation above a defined threshold. The policy must cover all qualifying employees.

Leave must be for a qualifying purpose. The purposes track the Family and Medical Leave Act categories: birth or placement of a child, care for a family member with a serious health condition, the employee's own serious health condition, and certain military-related circumstances.

Leave must be separate from other paid time off. Vacation, personal leave, and general sick leave don't count. The paid family and medical leave has to be a distinct category. An employer whose policy simply provides a pool of PTO covering everything does not qualify without restructuring.

State-mandated leave doesn't count. Leave paid or required by a state or local government is excluded from the credit calculation. In states with mandatory paid family leave programs, the credit applies only to what the employer provides beyond the mandate.

The deduction offset

Wages used to generate the credit cannot also be deducted. Your wage deduction is reduced by the credit amount. This is standard treatment and it doesn't erase the benefit, but the net value is less than the headline percentage.

Whether it's worth structuring for

For an employer already paying employees during leave informally, the answer is often yes. Putting a compliant written policy in place converts something you're already doing into a credit. The effort is drafting a policy, not changing your practice.

For an employer considering offering paid leave for the first time, the credit reduces the cost by 12.5% to 25% of the wages involved, and now potentially covers a slice of insurance premiums instead. That doesn't make paid leave free, but it changes the math, particularly for a small business competing for staff against larger employers with better benefits.

Permanence is what makes it worth the effort. A policy you draft this year will still be generating credits in five years.

This article is general information, not tax or employment law advice for your specific situation. Leave policies interact with federal and state employment law and should be reviewed with counsel as well. Please talk with us before acting on anything here.