How the H.R. 1 Law Impacts Employer Paid Family Leave Tax Credits

Signed into law in July, H.R. 1 (otherwise known as the One Big Beautiful Bill Act) has given employers several reasons to consider offering paid family and medical leave (PMFL).

The law makes permanent employer tax credits for a portion of wages paid while employees are on leave caring for family members. And for the first time, the law expands the credits to cover a portion of the premiums paid on policies that provide PFML and makes the credit available in states with their own laws requiring paid family leave.

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Expanding a tax credit that was set to expire at the end of 2025 removes “any doubt about offering PFML that may have existed prior to [H.R. 1’s] passage due to the previously temporary nature of the credit,” said David L. Sieck, an associate at law firm Fennemore. “This provides employers an opportunity to offer PFML as a benefit to their employees, increasing recruitment and retention, even when the program may be underutilized.”

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Growing Care Needs

The federal income tax credit for employers offering PFML was first introduced with passage of the 2017 Tax Cuts and Jobs Act. Advocates for making the credit permanent argued these benefits are needed now more than ever. More than 63 million Americans — roughly 1 in 4 adults — provide ongoing care to children or adults with medical conditions or disabilities, according to a July report released by AARP and the National Alliance for Caregiving. That’s up 45% since 2015, according to the report, which also found that 70% of surveyed are juggling paid employment and caregiving.

To date, large employers have been much more likely to offer PFML than smaller ones. According to a fact sheet distributed by Sen. Deb Fisher (R-Nebraska), a key backer of the changes, 41% of employees at businesses with more than 500 employees have access to PFML, compared to 20% of those at businesses with fewer than 99 employees. Fewer than 15% of service-industry workers and those whose salaries are in the bottom quartile have access to PFML, while management, professional and high-income workers are at least three times more likely to have it available.

The changes in the tax credit, advocates say, should make PFML more affordable for smaller organizations and more scalable for larger ones. They offer “meaningful support for working family caregivers and help create workplace policies that recognize the growing need to balance work and family obligations,” Bill Sweeney, AARP’s senior vice president of government affairs, wrote in a letter to leaders of the House of Representatives’ Ways and Means Committee prior to the passage of H.R. 1.

Strategies to Consider

According to Sieck, employers should review their current PFML policies — if one is in place — and determine if the eligibility change is right for their business and workforce.

Additionally, employers should ensure policies meet the requirements for the credit. “If an employer wants to take advantage of the credit, they should work with counsel to develop a compliant PFML policy meeting the minimum requirements,” said Caroline Pieper, an associate at law firm Seyfarth Shaw.

Among the requirements:

PFML must be offered to all qualifying employees and provide at least two weeks of paid leave a year at no less than half of an employee’s normal wages, according to Sieck.
Employees must work at least 20 hours a week to be eligible, although they now qualify after being employed for at least six months, down from a year in the current requirements.

As a reminder, the “P” in PFML matters, as up to 12 weeks of unpaid, job-protected leave are required through the Family and Medical Leave Act (FMLA). “Employers should determine how their PFML program will be administered relative to unpaid, federally mandated FMLA,” Pieper said. “If the employer intends for the programs to run concurrently, the policies should be drafted to clearly reflect that decision.”

Employers also may want to analyze whether to take credit for wages or premiums. For the first time, employers using private PFML insurance must choose between claiming a credit on a percentage of either the wages paid to qualified employees during leave periods or the policy premiums. Compare the two to “determine how best to utilize the credit,” Sieck said, as only paid leave that’s used can be counted for the credit.

“As with any employer-provided benefit, employers should be considerate of the cost and utilization of the program,” he said.

While H.R. 1 extends the tax credit to states with PFML mandates, any paid leave required by state law will not count toward the federal tax credit. The credit is available for portions of the program that “exceed what is mandated under the applicable state laws,” said Pieper.

Most importantly, include all stakeholders if starting a new plan. Bring in the benefits team, legal counsel, benefits broker and plan administrator to determine “the best methods for implementing PFML,” Sieck said.

Editor’s Note: Additional Content

For more information and resources related to this article, see the pages below, which offer quick access to all WorldatWork content on these topics:

How the H.R. 1 Law Impacts Employer Paid Family Leave Tax Credits

Growing Care Needs

Strategies to Consider

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