IRS Extends Federal Tax Transition Period for Colorado FAMLI Medical Leave - HR ALERTS

IRS Extends Federal Tax Transition Period for Colorado FAMLI Medical Leave

Due: January 1, 2026 Applies to Medical Leave Benefits Paid in Calendar Year 2026

The Internal Revenue Service (IRS) has issued guidance providing an additional one-year transition period for certain federal tax withholding and reporting requirements related to state paid medical leave benefits, including Colorado FAMLI.

What Changed

Under IRS Notice 2026-6, the IRS has extended the transition relief originally provided in Revenue Ruling 2025-4. As a result, calendar year 2026 will continue to be treated as a transition year for enforcement and administration purposes.

What This Means for Employers

For medical leave benefits paid by a state in 2026 that are attributable to employer contributions:

• Employers and states are not required to withhold federal income or employment taxes

• Employers and states are not required to apply third-party sick pay reporting rules

• No penalties will be assessed for failure to withhold, report, or furnish payee statements related to these amounts during 2026

This extension is intended to give states and employers additional time to update systems and processes before full compliance is required.

Important Clarification

This extension does not apply to employer “pick-up” contributions, where an employer voluntarily pays an employee’s required PFML contribution. Those amounts must continue to be treated as taxable wages and reported accordingly.

What Employers Should Do Now

Employers should continue current FAMLI payroll and reporting practices for medical leave benefits during 2026 and prepare for full federal compliance beginning in 2027. Vida HR is actively monitoring this guidance and will continue to advise clients as implementation requirements evolve.

Reference: IRS Notice 2026-6 

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