The IRS has extended for one more year the transition period for medical leave benefits that a state pays to an individual in 2026. The extension applies only to the portion of the medical leave benefits attributable to employer contributions and does not apply to family leave benefits.
Under the transition relief provided in Notice 2026-6, neither the state paid medical leave program nor the employer is required to report and withhold income and employment taxes under rules that would otherwise apply to third-party sick pay. The notice addresses only state-run programs and does not apply to an employer’s private or self-insured family and medical leave benefit plans.
In January 2025, the IRS issued Rev. Rul. 2025-4, its first-ever guidance on the federal income and employment tax treatment of contributions made to, and benefits paid from, a state-run paid family and medical leave (PFML) program, as well as the related reporting requirements. This had become an area of concern for many employers because more than a dozen states1 have enacted PFML laws without any federal guidance on how to tax the premiums paid to and benefits paid from such programs. See the BDO article IRS Issues First Guidance on Federal Income and Employment Tax for State Paid Family and Medical Leave Programs for more information on that guidance.
Revenue Ruling 2025-4 provided that calendar year 2025 would be a transition period for purposes of IRS enforcement and administration, intended to provide the states and employers time to configure their reporting and other systems and to facilitate an orderly transition to compliance with the new rules. But some states requested the additional one-year transition period, due to their need for more time to make the necessary changes to their systems and state budgets to comply with their federal income and employment tax obligations and reporting responsibilities. Thus, no penalties will be imposed on states and employers for 2026 for failure to report and withhold income and employment taxes from such state-run medical (but not family leave) programs.
Notably, Notice 2026-6 is silent on another issue raised in Rev. Rul. 2025-4 regarding the treatment of any premiums that are the employee’s responsibility to pay, but are paid by the employer. Rev. Rul. 2025-4 noted that, in such an instance, the value of those premiums paid by the employer -- but within the employee’s obligation to pay -- would be considered additional wages paid to the employee, thus requiring that the amounts be imputed to the employee via payroll. As a result, this requirement will presumably be enforced starting in 2026, and employers should ensure that they are properly imputing the value of taxes paid on behalf of their employees so that they can be reported as wages on Form W-2.
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1 As of January 1, 2026, California, Colorado, Connecticut, the District of Columbia, Delaware, Maine, Massachusetts, Minnesota, New Hampshire, New Jersey, New York, Oregon, Rhode Island, Vermont, and Washington mandate paid leave for an employee’s own serious health condition or disability and paid family leave for the birth or adoption of a child, to care for a seriously ill or injured family member, and for certain other matters.