Family & Medical Leave Credit Gets a Makeover Under OBBBA

The One Big Beautiful Bill Act (OBBBA) introduces important changes to the Family & Medical Leave (FML) Credit—changes that will affect how employers plan paid leave benefits. As tax advisors, it's critical to understand these updates so you can guide your business clients accordingly.

Background & What the Original Credit Did

Under prior law (TCJA and extensions), eligible employers offering voluntary paid family and medical leave (i.e. leave beyond what's legally required) could claim a tax credit ranging from 12.5% to 25% of wages paid during that leave—up to 12 weeks total.

To qualify, employers had to adopt a written leave policy covering full-time employees for at least two weeks (and part-time on a pro rata basis). Wages paid had to be at least 50% of the employee’s usual compensation. The credit was scheduled to expire after 2025.

Key Changes in OBBBA (Effective for Tax Years Beginning After Dec. 31, 2025)

The new law does more than extend the credit—it expands options and loosens certain eligibility rules.

1. The Credit Becomes Permanent

Instead of expiring, the FML credit is now made permanent, giving employers certainty in their long-term benefits planning.

2. An Alternative “Premiums” Option

Employers now have a choice: instead of basing the credit solely on wages paid to employees on leave, they may claim a credit based on amounts paid or incurred for insurance premiums that cover family and medical leave benefits.

• That is, you can take credit either on wages or on premiums—but not both.

• Importantly, if the credit is claimed for insurance premiums, those premiums cannot also be deducted as an expense. The credit essentially replaces that deduction.

  
  

3. Adjustment to “Qualifying Employee” Requirements

• The minimum employment tenure to qualify for the credit can change: Employers may reduce the requirement from one year to six months.

• The requirement of consistent weekly hours is revised: Employers must employ the qualified employee for at least 20 hours per week, though under certain circumstances the minimum service requirement may be adjusted.

• The definition of part-time employees is also revised to better align with credit eligibility.

  
  

What Business Clients Should Be Thinking About

1. Assess Your Paid Leave Policy: If your client offers paid family and medical leave—or is considering doing so—having a formal, documented policy is more crucial than ever. The premium-based credit option may make offering leave more financially feasible.

2. Choose Between Wages or Premiums: Analyze which method yields the greater tax benefit. For some businesses, paying premiums (especially for leave insurance coverage) may be more efficient. But remember, you can’t double-dip: premiums claimed for the credit aren’t deductible.

3. Review New Eligibility Cases: Clients who weren't offering the credit before due to strict employee tenure or hours might now qualify under the looser six-month rule or revised hour thresholds.

4. Plan Forward:Because the credit is now permanent, clients may feel more confident in offering and funding leave programs as part of their benefits package. It can be a differentiator in attracting and retaining talent.

5. Coordinate With Other Benefits: As you advise on leave benefits, ensure synergy with health insurance, disability, and other fringe benefits. The interaction between premium payments, deductions, and credit computation demands careful planning.

   
   

Final Thoughts

The changes to the Family & Medical Leave Credit under OBBBA mark a shift toward making paid leave more accessible and financially supported by tax law. For employers who already offer leave—or those considering doing so—this is an opportunity. As tax professionals, your role is to illuminate the path: help clients choose the optimal method, adjust policies, and structure benefits to maximize tax advantages while delivering meaningful support to employees.

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Disclaimer: This article is for informational and educational purposes only and does not constitute legal tax advice. Advanced Tax Solutions is not liable or responsible for any damages resulting from or related to your use of this information. It is your responsibility to refer to official IRS documentation for information regarding any tax laws or tax information shown here.