New Mexico employers occupy an unusual spot in the paid-leave landscape: the Legislature has repeatedly declined to enact a statewide paid family and medical leave program, most recently when House Bill 11 stalled in the 2025 session, so any family or medical leave benefit a New Mexico employer offers is voluntary. Voluntary happens to be exactly what the federal tax code rewards. Section 45S gives employers a general business credit for paid family and medical leave, the One Big Beautiful Bill Act made the credit permanent and added a way to claim it based on insurance premiums, and on August 5, 2026, Treasury and the IRS issued Notice 2026-28 explaining how that premium method works. For a state full of employers competing for workers against Colorado and Arizona wages, the notice is worth reading closely, and the comment window is open until October 16, 2026.
What is the section 45S credit and who can claim it?
Under 26 U.S.C. § 45S, an eligible employer with a written policy providing at least two weeks of paid family and medical leave at 50 percent or more of normal wages can claim a credit ranging from 12.5 percent to 25 percent of wages paid during the leave, with the percentage climbing as the payment rate rises toward full wage replacement. The leave must be FMLA-type leave, the categories in section 45S(e) such as bonding with a new child, caring for a family member with a serious health condition, or the employee’s own serious health condition, and the credit applies to qualifying employees who meet tenure and compensation limits. Ordinary vacation, personal leave, and sick time do not qualify, which also means the paid sick leave New Mexico employers must provide under the state’s Healthy Workplaces Act is a separate obligation, not a credit generator. The OBBBA’s amendments made the credit a permanent fixture rather than an expiring extender, so it now belongs in long-range benefits design, not just year-end tax projections.
What did the premium method add?
Many small employers cannot self-fund weeks of wage replacement, so they buy insurance instead: a paid family and medical leave policy, sometimes bundled with short-term disability coverage. The amended statute lets an employer elect to compute the credit as a percentage of premiums paid or incurred for such insurance, rather than of wages paid during leave. That is a meaningful shift for a twenty-employee Albuquerque firm: the credit arrives based on premiums whether or not anyone happens to take leave that year, the cost is predictable, and the insurer administers the claims. Notice 2026-28’s central rule keeps the two methods tethered: a premium is creditable only to the extent it funds benefits that would have qualified under the wage method had the employer paid them directly. The notice labels this “creditable coverage,” and it is the test every policy has to pass.
Which premium dollars fail the creditable coverage test?
Four categories fall out. Premiums funding leave that is not section 45S(e) family or medical leave, such as a rider covering ordinary short-term illness that does not rise to a serious health condition. Premiums covering individuals who are not qualifying employees when the premium is paid, a status the notice measures at premium payment, not when leave is later taken. Premiums funding leave that state or local law requires or that a government pays for. And premiums funding benefits that would not count as section 45S wages. Because real-world policies mix creditable and noncreditable coverage, the notice requires employers with these blended premiums to allocate using a reasonable method built on objective criteria, applied consistently across the year and across all entities treated as a single employer under the aggregation rules, and supported by contemporaneous records. Employers can even use the wage method for some leave and the premium method for other leave in the same year, with a strict prohibition on claiming both credits for the same instance of leave, and a split allowed when a benefit is funded partly by insurance and partly from general assets.
Why is the state-mandated leave exclusion good news for New Mexico employers?
The exclusion has real teeth in states that run mandatory programs: premiums or contributions attributable to leave required by state law generate no federal credit, and employers there are pushed back to the wage method for any benefits above the mandate. New Mexico has no such program, so a New Mexico employer’s entire voluntary policy can be creditable if it otherwise qualifies. The border complication comes from the workforce, not the statute book. A Farmington or Gallup employer with remote workers in Colorado pays into Colorado’s FAMLI program for those employees, and premiums attributable to that mandated coverage are excluded; the same logic follows employees in other mandate states. Multistate employers should ask their carriers to break premiums out by state and coverage type, because that invoice detail becomes the objective allocation record the notice demands. Employers whose only mandated obligation is Healthy Workplaces Act sick leave lose nothing, since that leave was never 45S-creditable to begin with.
What should a New Mexico employer do before year-end?
Employers already paying for family and medical leave coverage should have the policy reviewed against the creditable coverage categories and set up the allocation methodology now, during the tax year, because the notice expects contemporaneous support, not a March reconstruction. Employers considering adding a benefit should model the premium method against the wage method: predictable credit on premiums versus a potentially larger credit in a year of heavy leave usage. Everyone should confirm the basics that disqualify policies outright, including the written policy requirement, the minimum two-week benefit, the 50 percent payment floor, and non-discrimination toward part-year and part-time workers the statute requires. Taxpayers may rely on the notice for tax years beginning after December 31, 2025, and employers with unusual structures, staffing agencies, aggregated groups, or state-facilitated private coverage, should consider filing comments by October 16, since Treasury specifically asked about allocation factors and voluntary state-program interactions.
| Design question | Wage method | Premium method (Notice 2026-28) |
|---|---|---|
| Credit base | Wages actually paid during qualifying leave | Premiums paid or incurred for creditable coverage |
| Credit if no employee takes leave | None that year | Still available; based on premiums |
| Cash-flow profile | Variable, spikes with leave usage | Predictable, follows premium schedule |
| Key compliance burden | Tracking wages and leave categories | Creditable-coverage analysis and blended-premium allocation records |
| State-mandated leave interaction | Mandated benefits excluded from credit | Premiums for mandated coverage excluded; allocation required |
Frequently Asked Questions
Can New Mexico employers claim the section 45S paid leave credit?
Yes. Because New Mexico mandates no paid family and medical leave program, a voluntary written policy meeting the statute’s requirements can generate the credit at 12.5 to 25 percent of qualifying wages or, under the new premium method, of qualifying insurance premiums.
Does Healthy Workplaces Act sick leave qualify for the credit?
No. State-required leave is excluded from the credit, and ordinary sick leave is not section 45S family and medical leave in any event. The credit rewards voluntary FMLA-type benefits above the state’s sick leave mandate.
What is the premium method under Notice 2026-28?
An election to compute the credit as a percentage of premiums paid for paid family and medical leave insurance, limited to premiums funding coverage that would have qualified under the wage method, with allocation rules for policies mixing creditable and noncreditable coverage.
How do Colorado remote employees affect the credit?
Premiums or contributions attributable to Colorado’s mandated FAMLI coverage are not creditable, so multistate employers must allocate premiums by state with objective, consistently applied, documented methods.
Can an employer use both the wage and premium methods?
Yes, for different instances of leave in the same year, and a single leave benefit funded partly by insurance and partly from general assets can be split between methods. Claiming both credits for the same leave is prohibited.
How North Star Law Firm Can Help
North Star Law Firm helps New Mexico employers capture credits they are entitled to and defend them on examination, from policy design and creditable-coverage review to the allocation documentation Notice 2026-28 expects. Phillip Zagotti, JD/CPA, brings the combined tax-law and accounting perspective that benefit credits demand. The firm’s tax planning practice integrates credits into entity and compensation strategy alongside its business structuring work, and if a claimed credit draws IRS scrutiny, the firm’s audit defense practice handles the examination. Contact North Star Law Firm to model the premium method against your current benefits spend before the tax year closes.