According to an assistant commissioner from the Department of Employment and Economic Development, Minnesota's new paid family and medical leave program will require a 25% higher payroll tax when it starts in 2026 than initially expected if a proposed bill becomes law.
DEED Seeking 0.88% Payroll Tax Compared to Initially Proposed 0.7%
During a House Ways and Means Committee hearing, Evan Rowe from the Department of Employment and Economic Development (DEED) stated that the agency will seek a payroll tax of 0.88% for the state's new paid leave program, to be shared between workers and employers. This rate is higher than the originally discussed 0.7%, based on an updated actuarial analysis by Milliman, which guarantees Minnesota workers up to 12 weeks of paid family leave and 12 weeks of paid medical leave per year, with a maximum of 20 weeks per year.
Milliman, who conducted last year's actuarial analysis of the paid leave program, recommended a 0.88% payroll tax for the first year in a February letter, citing more significant uncertainty at the program's start and the prudence of an additional margin when benefits become effective.
House fiscal staff estimated on Monday that the 0.88% payroll tax will generate over $300 million more in revenue for the paid leave fund than the 0.7% rate, projecting the distribution of over $1.6 billion in benefits through the program in its first year.
While employees will pay up to half of the payroll tax, amounting to 0.44% of their taxable wages in the first year instead of the previously proposed 0.35%, employers can cover part of their employees' costs. The paid leave law from last year directs DEED to adjust tax rates based on the previous year's costs, with a maximum cap of 1.2%.
Amendments to The Paid Leave Bill
On Monday, Democratic-Farmer-Labor House members in committee approved changes to the paid leave bill. The bill introduced a seven-day waiting period for all medical claims, with payments distributed retroactively. For instance, someone who broke their hip would have the first week unpaid, but the program would later pay them for that initial week.
New parents who want to bond with their children would receive payment for the first week immediately, not retroactively. DEED stated that a 0.88% payroll tax would be necessary if the retroactive payment proposal became law.
DFL lawmakers have been exploring options to reduce the program's costs, such as making the first week of leave unpaid unless a worker can demonstrate they have less than 80 hours of saved paid time off, sparking controversy among the program's supporters. However, Senator Alice Mann, DFL-Edina, plans to adopt the House's retroactive benefits language and eliminate the PTO requirement. Mann also opposed the PTO proposal, noting that DEED and Governor Tim Walz's administration advocated for an unpaid week to reduce costs, wanting to ensure they keep the payroll tax premium as low as possible.
Regarding the 0.88% payroll tax, Mann noted that the 0.7% figure discussed last year was derived from a Department of Labor study, emphasizing that the premium fluctuates based on factors such as the economy, the number of people taking leave, and the state's average wage. This variability is expected, so the bill includes a payroll tax cap.
The Senate and House will discuss the paid leave changes this week.
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