IRS Notice 2026-28: What Michigan Employers Need to Know About the Expanded PFML Credit

On July 14, 2026, the IRS issued IR-2026-86 and Notice 2026-28, providing long-awaited guidance on the expanded employer credit for paid family and medical leave (PFML) under IRC §45S. The credit was made permanent by the Tax Cuts and Jobs Act extension legislation, and this notice fills in critical details that employers — especially small businesses in Michigan — need to understand before the next filing season.

If you own a small business, are reviewing your employee benefit policies, or are considering purchasing PFML insurance coverage, this notice directly affects how you calculate and claim the credit for tax years beginning after December 31, 2025.

Background: What Is the Employer PFML Credit?

The §45S credit allows eligible employers to claim a credit of 12.5% to 25% of wages paid to qualifying employees during PFML leave. The credit rate increases as the employer's wage replacement rate rises above 50%. To qualify, employers must have a written PFML policy that meets specific requirements, including a minimum two-week leave entitlement and a wage replacement rate of at least 50%.

Prior to Notice 2026-28, the credit was calculated exclusively on wages paid — the wage-based method. The expanded permanent credit now introduces a second option: the premium-based method.

The New Premium-Based Method

The most significant development in Notice 2026-28 is the introduction of the premium-based calculation method. Under this approach, employers who purchase a qualifying PFML insurance policy can base their credit on the premiums paid for that coverage rather than on wages paid during leave.

This is a meaningful change for small businesses. Many small employers have been reluctant to offer PFML because the administrative burden of tracking wages during leave — and the uncertainty of how much leave employees will actually take — made the credit difficult to plan around. The premium-based method gives those employers a predictable, straightforward number to work with: what they paid for the insurance policy.

The notice confirms that the premium-based method applies to qualifying insurance premiums paid for coverage that meets the §45S written policy requirements. Employers must still satisfy all other eligibility conditions, including the written plan requirement and the minimum wage replacement rate.

Blended-Premium Allocation

Notice 2026-28 also addresses how employers should handle blended premiums — situations where a single insurance policy covers both PFML leave and other types of leave or disability coverage that do not qualify for the §45S credit.

In these cases, employers cannot simply claim the entire premium. The notice provides an allocation methodology that requires employers to identify the portion of the blended premium attributable to qualifying PFML coverage. The IRS indicates that a reasonable allocation method based on actuarial or other supportable data is acceptable, but employers should document their methodology carefully.

For Michigan employers purchasing group disability or leave policies that bundle PFML with short-term disability, this allocation step is critical. Failing to properly allocate could result in an overstated credit and potential penalties on audit.

Avoiding Double-Counting: Wage Method vs. Premium Method

One of the most important clarifications in the notice is the anti-double-counting rule. Employers cannot claim the §45S credit under both the wage-based method and the premium-based method for the same leave event or the same employee during the same period.

Specifically, if an employer pays wages to an employee on PFML leave and also receives insurance reimbursement for those wages through a qualifying policy, the employer must choose which method to use — or carefully allocate to avoid counting the same economic benefit twice. The notice provides examples illustrating how this works in practice, including scenarios where the insurer reimburses the employer directly versus paying the employee.

This is an area where working with a CPA who understands both your payroll structure and your insurance policy terms is essential. The interaction between employer-paid wages, insurance reimbursements, and the credit calculation can be complex, and the IRS has made clear it will scrutinize double-counting on examination.

Reliance Period and Effective Date

Notice 2026-28 is effective for tax years beginning after December 31, 2025. Employers may rely on the guidance in the notice until proposed regulations are issued and finalized. This reliance period provides meaningful certainty — you can structure your PFML policy and credit calculations around the notice's rules without waiting for a final regulation.

The IRS has invited public comments on the notice, with a deadline of October 16, 2026. If you have concerns about how the rules apply to your specific situation — particularly around blended premiums or the interaction with Michigan's state PFML program — this is an opportunity to have your industry's voice heard.

What This Means for Michigan Small Businesses

Michigan does not currently have a state-mandated PFML program, which means Michigan employers offering PFML benefits are doing so voluntarily — and are well-positioned to take advantage of the federal §45S credit. Here is what you should be reviewing now:

• Do you have a qualifying written PFML policy? The written plan requirement is non-negotiable. If your employee handbook references FMLA leave but does not include a separate PFML policy with the required wage replacement language, you may not qualify.
• Are you currently paying PFML wages out of pocket? If so, you may already be eligible for the wage-based credit and simply haven't been claiming it. A retroactive review of prior years may be warranted.
• Are you considering purchasing PFML insurance? The new premium-based method makes the credit more accessible and predictable for employers who prefer to insure the risk rather than self-fund leave wages. The economics of purchasing coverage may look different once the credit is factored in.
• Do you have a blended disability/leave policy? If your current group policy bundles PFML with short-term disability or other leave, you will need to work through the allocation methodology before claiming the premium-based credit.
• Are you at risk of double-counting? If your insurer reimburses you for wages paid during PFML leave, review the anti-double-counting rules carefully before filing.

Next Steps

Notice 2026-28 is a meaningful expansion of a credit that many small businesses have overlooked or found too complicated to claim. The premium-based method, in particular, removes a significant barrier for employers who want to offer PFML benefits but have been uncertain about the credit mechanics.

That said, the blended-premium allocation rules and the anti-double-counting requirements add complexity that makes professional guidance important. Getting the credit right — and documenting your methodology — is essential before the IRS issues proposed regulations that may change the rules.

If you are a Michigan small-business owner and want to understand how Notice 2026-28 applies to your employee benefit policies, we are happy to walk through it with you.