Leave Laws & Benefits Under the BIG Beautiful Bill

Part 3: Leave Laws & Benefits — What’s Changing Under the BIG Beautiful Bill

October 14th 2025

The One Big Beautiful Bill Act (OBBBA), signed into law on July 4, 2025, brings the most significant federal updates to leave laws and employee benefits in years. While it doesn’t mandate paid leave, it permanently expands the Section 45S Paid Family and Medical Leave (PFML) tax credit and significantly increases dependent care and childcare incentives starting in 2026.

This article breaks down:

Key changes to paid leave and benefits,

New tax credit opportunities for employers,

Effective dates and compliance timelines, and
Action steps for HR and payroll teams.

1. Paid Family and Medical Leave Tax Credit Becomes Permanent

Previously set to expire at the end of 2025, the Section 45S Employer Credit for Paid Family and Medical Leave is now permanent under OBBBA. This is one of the most impactful changes in the bill, giving employers a long-term incentive to offer paid family and medical leave.

What’s changing:

Employers can include qualifying leave insurance premiums in addition to wages when calculating the credit.

The employee tenure requirement drops from 12 months to 6 months.

Employees must work at least 20 hours per week to qualify.

State-mandated leave counts toward eligibility but not toward the credit calculation.

Employers must meet wage replacement minimums of at least 50% of the employee’s regular pay.

Why it matters:

This change gives employers a stable, long-term framework to build or expand paid leave programs. For many organizations, especially mid-sized employers, this can unlock significant tax savings while improving recruitment and retention.

IRS – Section 45S Paid Family and Medical Leave Credit

2. Dependent Care FSA Limits Increase

The annual Dependent Care Flexible Spending Account (FSA) limit increases from $5,000 to $7,500 starting in 2026. This is the first major increase in years and reflects a broader effort to ease childcare burdens on working families.

Employer impact:

Employers must amend Section 125 cafeteria plan documents before the 2026 plan year to adopt the higher limit.

Failure to update documentation could disqualify the increased contribution from tax-favored status.

Nondiscrimination testing requirements still apply.

Why it matters:

This is a straightforward opportunity to enhance benefits offerings, increase employee satisfaction, and remain competitive in a tight labor market.

IRS – Publication 503: Dependent Care Assistance

3. Employer-Provided Childcare Credit Expansion

The Employer-Provided Childcare Credit (Section 45F) gets a major upgrade starting January 1, 2026.

What’s changing:

The credit increases from 25% to 40% of qualified expenses, or 50% for small employers.

The annual credit cap increases from $150,000 to $500,000 (or $600,000 for small businesses).

The definition of qualified childcare expenses expands to include contracted third-party childcare providers—not just on-site facilities.

Employer opportunities:

Offer or expand childcare benefits through partnerships with third-party providers.

Use the credit to offset costs of new childcare programs or facility investments.

Differentiate your benefits package in a competitive hiring market.

IRS – Section 45F Employer-Provided Childcare Credit

4. No Federal Leave Mandate — But More Incentives to Offer Leave

It’s important to note that OBBBA does not create a federal paid leave mandate. Instead, it creates strong financial incentives through permanent tax credits and expanded benefit options.

This incentive-based structure allows employers flexibility in how they design leave programs while rewarding those who proactively support their workforce.

However, state and local leave laws continue to evolve. Employers operating in multiple jurisdictions must coordinate federal incentives with state-mandated programs to avoid conflicts and missed credit opportunities.

U.S. Department of Labor – FMLA

5. Effective Dates and Key Deadlines

Provision	Effective Date	Employer Action Item
Permanent PFML Tax Credit (Section 45S)	January 1, 2026	Review leave policies, confirm eligibility, document compliance
Dependent Care FSA Limit Increase	January 1, 2026	Amend Section 125 plan documents before 2026 plan year
Employer-Provided Childcare Credit (45F)	January 1, 2026	Explore partnerships with third-party childcare providers
Overtime Tax Deduction	January 1, 2025	Coordinate with payroll providers and update systems

6. Action Steps for Employers

Audit your current leave policies to ensure they meet Section 45S eligibility requirements.

Amend plan documents and coordinate with payroll teams before 2026.

Explore childcare benefit strategies that align with the expanded 45F credit.

Train HR and payroll teams on new eligibility, documentation, and reporting rules.

Communicate early with employees to maximize participation in new benefits.

Frequently Asked Questions: Leave Laws & Benefits (OBBBA)

Does OBBBA mandate paid family and medical leave?

No. OBBBA does not mandate paid leave. It makes the Section 45S employer tax credit permanent for qualifying paid family and medical leave policies.

What changed with the Section 45S PFML tax credit?

The credit is permanent starting in 2026 and more flexible. Employers must meet minimum wage replacement (≥50%), include anti-interference language in policy, and follow tenure/hour thresholds.

When do Dependent Care FSA and childcare credit updates take effect?

Most benefit changes, including the Dependent Care FSA increase and expanded Section 45F childcare credit, take effect January 1, 2026.

Do state leave programs count toward the PFML credit?

State-mandated leave can count toward eligibility, but not toward the amount used to calculate the federal Section 45S credit.

What documents should employers keep on file?

Written leave policies, payroll/time records, Section 125 cafeteria plan documents, eligibility determinations, and childcare expense substantiation—retained for at least four years.

Agencies to Watch

Congress.gov – One Big Beautiful Bill Act Summary

IRS – Section 45S Paid Family and Medical Leave Credit

IRS – Section 45F Employer-Provided Childcare Credit

IRS – Publication 503: Dependent Care Assistance

U.S. Department of Labor – FMLA Compliance Guide

Final Thoughts: A Strategic Shift in Leave and Benefits

The One Big Beautiful Bill Act represents a major shift in how employers can structure paid leave and dependent care benefits. While not a federal mandate, the financial incentives are designed to drive voluntary adoption of more robust benefits programs.

Organizations that act early can:

Maximize tax credits,

Strengthen recruitment and retention strategies, and

Stay ahead of compliance deadlines.

This is more than a compliance issue — it’s a strategic opportunity to build a modern, competitive workforce strategy.

Partner with MP to Stay Ahead

MP’s team of SHRM-certified compliance experts helps businesses build proactive strategies, prepare documentation, and stay ahead of legislative changes like OBBBA. Contact us today to schedule a compliance consultation.