The IRS, in Notice 2026-6, has issued a one year extension of the transition period provided in Revenue Ruling 2025-4 for states and employers administering paid family and medical leave (“PFML”) programs with respect to medical leave benefits a state pays to an individual which are attributable to employer contributions.
Background. The IRS had previously issued Revenue Ruling 2025-4 to explain the federal income and employment tax treatment of contributions and benefits paid under state-paid family and medical leave laws.
Revenue Ruling 2025-4 provided the following guidance:
- Employer contributions. The employer may deduct any required employer contributions as an excise tax. The employee does not include the employer contribution in gross income.
- Employee contributions. The employer must include the employee contribution as wages in the employee’s Form W-2. The employee may deduct the employee contribution as a state income tax if the employee itemizes deductions.
- Employer pick-up of employee contributions. The employer may deduct a pick-up payment as an ordinary and necessary business expense and must report any pick-up payment as wages on the employee’s W-2. The employee may deduct the employer pick-up payment as a state income tax if the employee itemizes deductions.
- Family leave benefits. The employee must include the amount attributable to the employer contribution (e., an employer contribution not previously included in the employee’s income including any employer pick-up payment) as income. This amount is not reported as wages. The state must file a Form 1099 with the IRS and furnish a copy to the employee.
- Medical leave benefits. The employee must include the amount attributable to the employer contribution as income, except as otherwise provided in the rules for accident and health plans. This amount is reported as wages. The sick pay reporting rules apply to these medical leave benefits. These payments are reported as third-party payments of sick pay.
Revenue Ruling 2025-4 was generally effective for payments made on or after January 1, 2025, but included a transition period covering all of calendar year 2025 to “provide States and employers time to configure their reporting and other systems and to facilitate an orderly transition to compliance.”
Notice 2026-6. IRS says it understands that states may need additional time to make the necessary changes to their systems and state budgets to comply with their federal income tax and employment tax obligations, as well as related information.
For this reason, calendar year 2026 will be an additional one-year transition period for purposes of IRS enforcement and administration.
Thus, for medical leave benefits a state pays to an individual in calendar year 2026, with respect to the portion of the medical leave benefits attributable to employer contributions, a state or an employer:
- is not required to follow the income tax withholding and reporting requirements applicable to third-party sick pay;
- is not required to comply with related information reporting requirements;
- is not required to withhold and pay associated taxes; and
- will not be liable for any associated penalties.
The Notice is effective for medical leave benefits paid from states to individuals during calendar year 2026
The Notice can be found at https://www.irs.gov/pub/irs-drop /n-26-06.pdf