Colorado’s FAMLI Emergency Amendment Delays until 2027, Colorado Employers’ Requirement to Report the Employers’ FAMLI Contribution as Employee Income to IRS
Brett A. Whitley, Associate
On January 1, 2026, the Colorado Department of Labor and Employment’s Division of Family and Medical Leave Insurance (the “Division”) issued an emergency amendment (the “Amendment”) to its regulations concerning employee and employer rights and responsibilities under Colorado’s Paid Family and Medical Leave Insurance Act and program (“FAMLI”). The Amendment extends the time period to comply with certain tax reporting and withholding requirements issued by the IRS.
FAMLI
FAMLI provides paid family and medical leave benefits to eligible workers through a state-administered insurance program. The program covers five types of qualifying leave: new child care, family caregiving for serious health conditions, personal medical leave, military family leave, and safe leave. Eligible workers can receive up to 12 weeks of paid leave annually, with additional weeks available for pregnancy complications and neonatal intensive care situations, funded through employer and employee premium contributions.
Rev. Rul. 2025-4
On January 15, 2025, the IRS published Rev. Rul. 2025-4 (the “Ruling”),[1] which addressed the federal income and employment tax treatment of contributions and benefits paid under state paid family medical leave (“PFML”) statutes, like FAMLI, as well as the reporting requirements for employers that participate in programs like FAMLI. Most relevant here, the Ruling concludes that amounts paid to an employee by Colorado as medical leave benefits that are attributable to the employer’s contribution pursuant to FAMLI are included in an employee’s gross income, are wages for federal employment tax purposes, and are considered third-party payments of sick pay.
The Ruling was to be effective for tax years after December 31, 2025, making 2025 a transition period for purposes of enforcement and administration of the reporting requirements and other rules included in the Ruling.
Notice 2026-6 and the Amendment
On December 19, 2025, just weeks before the transition period for employers to begin compliance with the Ruling and specifically, the requirement that FAMLI benefits be treated as third-party sick pay, the IRS issued Notice 2026-6 (the “Notice”).[2] The Notice extends the transition period to comply with this portion of the Ruling through 2026 and states:
(1) For medical leave benefits a State pays to an individual in calendar year 2026, with respect to the portion of the medical leave benefits attributable to employer contributions, (a) a State or an employer is not required to follow the income tax withholding and reporting requirements applicable to third-party sick pay, and (b) consequently, a State or employer will not be liable for any associated penalties under § 6721 for failure to file a correct information return or under § 6722 for failure to furnish a correct payee statement to the payee.
(2) For medical leave benefits a State pays to an individual in calendar year 2026, with respect to the portion of the medical leave benefits attributable to employer contributions, (a) a State or an employer is not required to comply with § 32.1 and related Code sections (as well as similar requirements under § 3306) during the calendar year; (b) a State or an employer is not required to withhold and pay associated taxes; and (c) consequently, a State or employer will not be liable for any associated penalties.
In response to the Notice, the Division issued an emergency amendment to its regulations concerning FAMLI benefits (7 CCR 1107-3). Like the Notice, the Amendment revised Colorado’s regulations by delaying the implementation of the Ruling until January 1, 2027, allowing Colorado employers to not treat FAMLI benefits as third-party sick pay and to not require federal income tax withholding on FAMLI benefit payments at a 10% rate.
Employer Considerations
Employers and third-party administrators participating in FAMLI do not need to make changes to payroll systems, employer reporting, or federal tax filings related to FAMLI benefits. However, despite the delay of Colorado employers’ required adherence to the Ruling, Colorado employers should continue to take steps, such as updating payroll systems, to ensure they are compliant with the Ruling by 2027. Campbell Litigation is available to assist Colorado employers to ensure they comply with the Division’s regulations on FAMLI as well as the Ruling as 2027 approaches.
[1] https://www.irs.gov/pub/irs-drop/rr-25-04.pdf.
[2] https://www.irs.gov/pub/irs-drop/n-26-06.pdf.