As background, in January 2025, the IRS issued Revenue Ruling 2025-4, which provided guidance on the federal tax treatment and reporting requirements of contributions to and benefits paid under a state-paid family and medical leave program. The Revenue Ruling was effective for payments made on or after January 1, 2025, but provided transition relief for 2025. The IRS recently extended this transition relief for medical leave (but not family leave) benefits paid in 2026 (Notice 2026-06).

The Notice states that a number of states requested that the 2025 transition period be extended for an additional year or that the effective date be amended, and Treasury/IRS understand that “[s]tates 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.” Thus, the IRS is extending the transition relief for medical leave benefits a state pays to an individual in 2026, with respect to the portion of the medical leave benefits attributable to employer contributions. Under the transition relief, a state or an employer is not required to follow the income and employment tax withholding and reporting requirements applicable to third-party sick pay and will not be liable for any penalties for the failure to do so.   

Although the Revenue Ruling, and thus the Notice, only addresses state-run programs and not an employer's private or self-insured family or medical leave plans, the IRS’ reasoning in the Revenue Ruling, and thus the Notice, may provide insights on how the IRS views the withholding and reporting obligations under private plans.

See our prior alert on the Revenue Ruling here: IRS Provides Tax Guidance Related to State-Run Paid Family and Medical Leave Programs