Beginning in 2026, Minnesota will implement a paid family leave program (PFL) that provides family leave and medical leave benefits. The State of Minnesota will be requiring employers participating in the State’s program to report PFL medical leave benefits (not family benefits) on the employer’s Form W-2 — and this may implicate the definition of compensation in the employer’s defined contribution retirement plans. Employers should review the definition of compensation in their retirement plan documents to determine whether any action is needed prior to 2026.
Background on Minnesota PFL Taxation
On October 1, 2025, the Minnesota Department of Employment and Economic Development issued guidance on the taxation of contributions to the Minnesota PFL program and distributions from the program. This guidance only applies to employers participating in the PFL program administered by the State of Minnesota and will not apply to a fully insured or self-funded PFL program.
Pursuant to that guidance, the portion of the PFL medical leave benefit attributable to employer contributions will be taxable wages. The State of Minnesota will deduct Social Security and Medicare taxes from the portion of the PFL medical leave benefit payments that are treated as wages and remit those amounts to the IRS.
The State of Minnesota will then provide a report to the employee’s employer noting the amount of the PFL medical leave benefit treated as wages so that the employer can include this payment in the employer’s quarterly federal tax return and pay the employer’s portion of the Social Security and Medicare taxes owed on the PFL medical leave payments. Employers in Minnesota participating in the State of Minnesota’s PFL program will then report the portion of the PFL medical leave benefit treated as wages on the Form W-2 that the employer issues to the employee after the end of the year.
Definition of Compensation in the Company’s Defined Contribution Plan
Defined contribution retirement plans, like 401(k) and 403(b) plans, define “compensation” for purposes of calculating employee deferrals and employer contributions made to the plans. Some defined contribution plans define compensation as the amounts reported on the participant’s Form W-2, while others may refer to Code Section 3401(a) wages (withholding wages) or Code Section 415(c) compensation, as may be adjusted pursuant to the terms of the applicable plan.
Because the PFL medical leave benefits treated as wages will be reported on the Form W-2 issued by the employer, it is possible that a defined contribution retirement plan’s definition of compensation would include the PFL medical leave benefits even though not directly paid by the employer.
Plan sponsors should review the definition of compensation and assess whether any changes are needed for PFL medical leave benefits paid by the State of Minnesota. For example, if the defined contribution plan’s compensation definition would include the amounts paid to the employee by the State of Minnesota, you may want to consider revising the plan definition, because the employer will not be able to take deferral deductions from amounts not actually paid by the employer.
Note, employers should also consider whether the PFL medical leave benefits would implicate the nonqualified deferred compensation plan’s definition of compensation.
We will continue to monitor and provide updates. If you have any questions, please reach out to your Faegre Drinker benefits counsel.
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