What Happened?

As a reminder for employers in Colorado, the FAMLI Division has confirmed its approach for 2026 following recent Internal Revenue Service (IRS) guidance. This confirmation affects federal tax reporting obligations and payroll administration by deferring previously anticipated changes until a later year.

• The IRS extended the PFML federal tax transition through calendar year 2026 for the portion of state‑paid medical leave benefits attributable to employer contributions (Notice 2026‑06).

• Rev. Rul. 2025‑4 originally took effect January 1, 2025, with 2025 designated as a transition year for enforcement and administration.

• Colorado’s response: FAMLI will keep its existing federal tax treatment in 2026; no changes to payroll systems, employer reporting, or federal tax filings for FAMLI benefits. The state adopted an emergency rule to delay implementation of federal mechanics until 2027.

Overview

• Deferred for 2026: States and employers do not have to apply third‑party sick pay income‑tax withholding, employment‑tax (FICA/FUTA), or related information‑reporting rules to state‑paid medical leave benefits attributable to employer contributions. No penalties apply for not doing so in 2026.

• Not deferred: Employer “pick‑up” contributions (voluntary payment of the employee share) remain taxable wages and must be reported on Form W‑2.

Why this matters:

• Employers and Third-Party Administrators (TPAs) participating in Colorado FAMLI can avoid mid‑year payroll reconfiguration and continue current processes in 2026, reducing implementation risk and penalty exposure.

• Use the extra time to plan for 2027 compliance (third‑party sick pay mechanics) while continuing to treat employer pick‑ups as taxable wages now.

Key Risks for Employers

• Misclassifying employer “pick‑ups”: These are still taxable wages in 2026 and must be reported on the W‑2. Failure to do so risks under‑withholding and reporting errors.

• Turning on third‑party sick pay in 2026: Colorado will not treat FAMLI medical benefits as third‑party sick pay in 2026; prematurely switching payroll settings can cause mismatches.

• Year‑end form confusion: FAMLI will continue issuing Form 1099‑G to employees for 2026 benefits; employers should not add those benefits to W‑2 wages. FAMLI benefits remain exempt from Colorado state income tax.

• Underpreparing for 2027: Colorado’s emergency rule delays federal tax mechanics until 2027. Employers should build a readiness plan and monitor rulemaking updates.

Source References:

• Colorado FAMLI – IRS Extends Paid Leave Tax Timeline: What Colorado Employers Need to Know (January 1, 2026)
• Reminder Colorado: Paid Family Medical Leave Rates Effective January 1, 2026
• Colorado – FAMLI Newsletter (September 30, 2025)
• Colorado – FAMLI – IRS Tax Guidance — FAMLI Medical Benefits

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