The budget bill President Donald J. Trump signed into law on July 4, commonly called the “One Big Beautiful Bill Act” (OBBBA), affected a tax code provision that allows employers to take a credit for their paid family and medical leave (PFML) expenditures. In brief, the OBBBA makes the tax credit permanent and broadens its coverage to PFML insurance premiums and leave taken by newer employees than previously allowed, among other changes. The amendments apply to taxable years beginning after Dec. 31, 2025.

Background: PFML tax credit

The PFML tax credit was included in the 2017 Tax Cuts and Jobs Act. Prior to the amendments, it was equal to a percentage of wages paid through Dec. 31, 2025, to qualifying employees who took family and medical leave.

Employers must provide at least two weeks of paid family and medical leave at a payment rate that is at least 50%of an employee’s normal pay rate for the credit to apply. As it currently stands, before the amendments take effect, the credit does not apply to leave required by state or local law or paid for by state or local governments. It also does not apply to vacation leave, personal leave, or sick leave.

OBBBA amendments

Most importantly, the OBBBA makes the PFML tax credit permanent by removing the sunset provision that would have seen the credit expire at the end of 2025.

The OBBBA amended the tax credit in other ways, including by allowing employers with PFML insurance to take the credit for a percentage of their premiums. As part of a growing trend, states have begun allowing insurance carriers to sell employer policies that cover the cost of PFML provided voluntarily. Moreover, the OBBBA allows the PFML tax credit for this premium expense even if none of the employer’s workers actually take PFML.

Under the amendments, leave paid by a state or local government or required by state or local law will be taken into account in determining the amount of PFML provided by the employer, but not in determining the amount of the tax credit.

Furthermore, the tax credit was previously available only for PFML taken by employees who had worked for the employer for at least one year. Under the OBBBA amendments, the work tenure requirement is reduced to six months. Another amendment stipulates that the PFML credit will apply only to leave taken by employees who work at least 20 hours per week.

Next steps for employers

Employers that provide PFML voluntarily should review the amendments and their leave policies to determine whether they qualify for this potentially valuable tax credit.

Provided by Christensen Group Insurance. This Legal Update is not intended to be exhaustive, nor should any discussion or opinions be construed as legal advice. Readers should contact legal counsel for legal advice. ©2025 Zywave, Inc. All rights reserved.