October 16, 2025

Confused about the new PFML tax credit? Here’s what to know (and what we’re still waiting on)

What is the PFML tax credit and what’s new in 2026?

The PFML tax credit is not new – it has been around since 2017 but is being expanded effective January 1, 2026. The PFML tax credit works by reducing the employer’s income tax liability using a calculation tied to the provision of paid leave to employees. The tax credit offset can now be based on the amount of premiums the employer pays towards PFML insurance - in both mandated and non-mandated states - or the amount of wages the employer pays to persons on leave (which was the sole basis for the credit before this change in the law).

What are the top-line impacts?

  1. The tax credit can be taken for employer-paid short-term disability premiums if the plan design meets additional qualifications (e.g., offers at least 50% wage replacement; covers all qualifying employees, including those working 20 hours a week or more; none excluded by pre-existing conditions; and more). Note that premiums for certain highly compensated employees are not included in the tax credit calculation.
  2. The tax credit can be applied in all states but the most value is to those employers with employee populations in non-mandated states (the tax credit is only applied to the difference between benefits guaranteed or required by the state and an employer’s “top up” of wage replacement).
  3. The size of the potential tax credit is unlikely to entice employers to adopt a leave plan who were not already considering it, but may be enough to incentivize employers to amend or expand their existing leave/STD plan (e.g. it’s a nice incentive but the cost of the program is still large compared to the benefit)

Why are we still awaiting?

Guidance from the Treasury Department on this new legislation is expected soon and will be important to clarify whether:

  • Fully insured and self-insured short-term disability (STD) plans are eligible for the tax credit.
  • The credit is limited to premiums tied to 12 weeks of disability.
  • An employer can claim the tax credit for wages replaced via corporate leave as well as for STD premiums paid.
  • Employers can still deduct insurance premiums as a business expense (after reducing the expense by the amount of the tax credit taken).
  • Benefits offered in excess of state requirements in PFML-mandated states can be included in the tax credit calculation.

Next steps for employers

Since we are unable to provide employers with tax and/or legal advice, employers interested in the tax credit should consult with their employee benefits tax counsel to determine whether their paid leave plan is (or can be) structured to qualify.

Unum will update this guidance as we learn more about the PFML Tax Credit.