The Minnesota Paid Leave Law (“the Law”), effective January 1, 2026, creates a statewide paid family and medical leave (“PFML”) program similar to those in place in other states, such as Massachusetts and Oregon. While much commentary has focused on HR and payroll administration, the Law also creates important tax and retirement plan issues that employers should consider.

The Basics

Under the Law, employers must provide paid leave for a variety of employee needs:

• Employee Serious Health Condition: Leave when an applicant is unable to perform regular work due to a serious health condition, including inpatient care, continuing treatment, or periods of incapacity.
• Medical Care Related to Pregnancy: Leave for prenatal care, incapacity due to pregnancy, recovery from childbirth, miscarriage, stillbirth, or related medical conditions.
• Family Care Leave: Leave to care for a family member with a serious health condition, or to care for a family member who is a military service member.
• Bonding Leave: Leave for bonding with a new child following birth, adoption, or foster placement. Bonding leave can begin at a time selected by the employee and must occur within 12 months after birth or placement.
• Qualifying Exigency Leave: Leave for needs arising from a family member’s active-duty service or call to active duty, including arranging childcare, attending military events, managing finances or legal matters, spending time with the service member during rest and recuperation, or handling matters after a service member’s death.
• Safety Leave: Leave due to domestic abuse, sexual assault, or stalking affecting the applicant or the applicant’s family member.

Employees can take up to 12 weeks of family leave and up to 12 weeks of medical leave per benefit year, but capped at 20 weeks total in a benefit year if an employee takes both types.

Employers can choose to provide coverage either by participating in the state-run program, by purchasing private insurance, or by self-insuring. And, employers can make independent decisions regarding how to provide the medical portion of the required coverage and the family leave portion.

Premiums in the state-run program are set as a percentage of the taxable wages of employees in covered employment. The premiums beginning January 1, 2026, are set at 0.88% representing 0.61% for Medical Leave and 0.27% for Family Leave (with reduced rates for employers with fewer than 30 employees). These rates are adjusted annually based on actuarial analysis to maintain fund solvency, but rates may not exceed 1.1% of taxable wages. Employers must pay at least 50% of the annual premium, with the remainder permitted to be withheld proportionally from employee wages. 

The amount payable varies, based on the following percentages of the State Average Weekly Wage (“SAWW”) of $1,423 per week:

• 90% of wages up to 50% of SAWW, plus
• 66% of wages between 50% and 100% of SAWW, plus
• 55% of wages above 100% of SAWW, capped at 100% of SAWW.

Choices and Consequences

Employers will face challenges in implementing the Law and in addressing the HR, payroll, and finance changes required. Adding to this complexity are some retirement plan implications that should also be considered. For example:

• As noted, employers can choose to pay the employee share of premiums under the Law. However, as noted by the IRS in Revenue Ruling 2025-04, if the employer does pay the employee portion, that pick-up is taxable income to the employee and is reportable on the W-2.
• Benefit payments for medical leave may be excluded from employees’ taxable income—depending on whether paid from employee contributions (not taxable) vs employer contributions (taxable). 
• Benefit payments for family leave are always taxable income to the employee.
• Even when taxable income, the treatment of this income can vary—payments made by a state-run program are income to the employee (reportable by the state on a Form 1099), but are not employer wages subject to FICA taxes or reportable on employer W-2. On the other hand, if an employer self-insures, these payments are employer-paid amounts subject to FICA taxes and reportable on the employer’s W-2.

These distinctions matter because many retirement plan definitions of “compensation” tie employer and employee contributions to wages subject to FICA or to amounts reported on Form W-2.

So, in addition to complying with the Law, employers need to address the implications on their retirement plans of contributions and payments under the Law. In effect, there is a new wrinkle to the constant questions of whether a particular form of compensation is subject to employee deferrals and to employer contributions.

In addressing these questions, here are a few observations:

• As noted above, the IRS has issued guidance for payments to and from a PFML. This IRS guidance was limited to a state-run insured program providing paid medical and family leave. Accordingly, there is no comparable IRS guidance for employers that use private insurance or a self-insured arrangement to comply with the Law. This means that any alternative arrangement could generate different forms of taxable income that may be includible in the employer-provided retirement plan.
• Doing the minimum needed to comply with the Law (participating in the state insurance plan and not self-insuring; requiring employees to pay their full premiums and not picking up employee premiums) is the alternative that has the minimum impact on other benefit plans. As noted by the IRS, payments under this approach are income to employees—but are not employer wages.
• If an employer is considering a different compliance strategy for the Law, it might be prudent to clarify compensation-related benefit plans to specify that neither premiums nor benefits paid under the Law represent compensation under the employer’s benefit plans. In the case of a retirement plan, this would probably require a short amendment to the plan’s definition of compensation.

Conclusion

Because the PFML program may interact with payroll, taxation, and retirement plan definitions of compensation, employers should begin reviewing their HR, payroll, and benefit plan documents as part of the implementation of the Law. Clarifying these issues early can prevent unintended inclusion (or exclusion) of PFML-related payments in retirement plan contributions and reduce administrative burden once the program begins.