In February 2025, the IRS released long-awaited guidance on the federal tax treatment of state Paid Family and Medical Leave (PFML) programs. The ruling carries major implications for Washington, Oregon, and Colorado, where employer premium contributions are required. For the first time, both employees and employers face federal tax liability in ways not previously contemplated.
Currently, employers contribute 55% of medical leave premiums while employees pay 45%. Family leave premiums are funded entirely by employees. The new IRS guidance imposes straightforward tax liability on family leave benefits even with employer premium contribution. The treatment of medical leave benefits, however, is more complex, creating challenges for claimants, employers, and the PFML program.
To minimize tax exposure and burdens on all parties, the PFML program is reviewing a proposal to shift employer contributions from medical leave to family leave. Under this approach, employers would cover 59% of family leave premiums, while employees would assume 100% of medical leave premiums.
WR’s Government Affairs team is actively engaged in efforts to address the proposed shift in premium collection for the Paid Family and Medical Leave (PFML) program. The association is working to ensure that any changes do not increase the burden on employers compared to the current premium structure. A key concern is the issue of retrospective tax liability, given the IRS effective date of January 1, 2026. Even if the Legislature prioritizes and passes the proposal during the 2026 session, uncertainty remains about whether the PFML program’s systems will be ready in time. As part of this work, WR team member Rose Gundersen is representing the business community on the PFML Advisory Committee, advocating for practical solutions and employer protections.
