Paid Leave Oregon – Volume III: Tax Status of Contributions and Benefit Payments
By Christine M. Zinter - Bullard Law
January 24, 2023
As outlined in our previous alerts, most businesses with Oregon employees began paying into Oregon’s new family and medical leave insurance (“FMLI”) program as of January 1, 2023. While several “in the weeds” administrative questions still remain unanswered, Paid Leave Oregon and the Oregon Department of Revenue have issued guidance regarding the taxability of the program’s mandatory contributions and plan benefits—at least for those employers who have not chosen to opt out of the State’s program and run an equivalent plan through an insured product or self-insured leave policy.
In a December 16, 2022 correspondence from the Oregon Department of Revenue to Ms. Karen Hummelbaugh, Director of Paid Leave Oregon, the Department of Revenue warns that the federal taxability of benefits from the program would ultimately be determined by the Internal Revenue Service, which has not yet provided guidance. However, under Oregon’s state tax laws, the contributions and plan benefits will be treated as follows:
• Employee contributions (0.6% of payroll) are made post-tax and therefore included in wages subject to Oregon income tax withholding.
• Employee contributions should be reported in box 14 of the W-2.
• Employee contributions are not allowed as an Oregon itemized deduction.
• Should an employer elect to cover the employee’s portion of the contribution, that amount would be considered imputed income and taxable wages to the employee.
• Family leave benefits and safe leave benefits are fully taxable to the employee.
• Medical leave benefits are taxable based on the ratio of employer contributions to total contributions—in other words, 40% of the medical leave benefit will be considered taxable income (unless the employer is picking up the employee’s contribution, in which case the benefit would be 100% taxable).
• Assistance grants made to small employers who choose to make an employer contribution are generally fully taxable to the employer.
Bullard Law notes that the tax treatment of medical leave benefits is similar to the taxation of other disability benefit plans. In short- and long-term disability programs, if an employee makes a premium contribution with post-tax dollars, the benefits are free from tax. If an employer pays for the benefit (or an employee pays for the benefit with pre-tax dollars), the benefit is taxable.
This suggests that employers who have chosen to purchase an insured product to provide an equivalent plan should expect the same tax treatment for benefit payments, though when employers pay 100% of the premium for true disability insurance products, the employer does not treat those premium payments as imputed income to the employee. It seems the Oregon Department of Revenue is treating Paid Leave Oregon “contributions” as a tax—and therefore subjecting employees to imputed income calculations if the employer covers the employee portion. Whether that would hold true if an employer paid 100% of an insurance premium (which is clearly not a tax) is one of several still-unanswered questions.
Bullard Law will continue to follow this topic closely and will keep you apprised of any new guidance issued by Paid Leave Oregon and/or other agencies. If you have any further questions about this new state FMLI program, please give the attorneys at Bullard Law a call.
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