By: HUB's Absence Management Team

On March 11, 2026, Washington Governor Bob Ferguson signed Second Substitute House Bill 2345 (HB 2345), new legislation that eases the Internal Revenue Service (IRS) tax burden on employers and saves money for Washington workers who participate in the state’s Paid Family and Medical Leave (PFML) program. The measure responds to IRS guidance issued last year pertaining to state-run paid leave programs, including Washington’s, and will simplify implementation and reduce ongoing tax-related burdens on employers, workers, and the Employment Security Department (ESD).

Background

Washington’s PFML program has been providing benefits to workers since 2020. The program is funded through premiums shared between employers and employees. In 2025, the IRS issued guidance on the federal tax treatment of state-run paid leave programs that created potential complications for Washington’s existing premium structure. Specifically, certain medical leave payments from the state could have been subject to federal employment taxes, such as Social Security and Medicare (FICA), depending on how employer contributions were classified.

Without legislative action, these tax liabilities could have totaled up to $30 million annually, drawn from the state’s Paid Leave trust fund or passed on to Washington employers. ESD requested the legislation to address these concerns proactively.

What the new law does

HB 2345 makes a targeted accounting adjustment to the way employer contributions are allocated between the medical leave and family leave portions of the PFML program. Because employer contributions for paid family leave are not subject to federal employment taxes, moving employer contributions from the medical leave side to the family leave side prevents additional federal tax liability. Specifically, the new legislation:

  • Swaps employer contributions through a technical accounting adjustment from the program’s medical leave premiums to the family leave portions
  • Leaves total contributions unchanged for Washington workers and employers
  • Eliminates what could have been up to $30 million in annual federal tax liabilities
  • Reduces administrative burdens that would have resulted from compliance with the IRS guidance

Important: The new law will impact the 2027 premium rate split but does not affect the 2026 premium rate or contribution split. ESD will provide additional information to employers on how to implement the new premium split later this year. The 2027 premium and detailed premium calculations will be announced by mid-November 2026.

Impact on employers

While the legislation shields employers and workers from the most significant tax consequences, employers should be aware of the following:

  • No changes for 2026: The current premium rate and employer/employee contribution split remain in effect for 2026. Employers do not need to take any immediate action regarding payroll or premium calculations.
  • 2027 premium split will change: The accounting adjustment will be reflected in the 2027 premium rate split. ESD will communicate the details to employers before implementation is required.
  • Potential residual tax implications: Employers could still have tax implications related to premium contributions. Employers should consult with their tax advisors to fully understand any remaining responsibilities.
  • Total contribution amounts unchanged: The overall cost to employers and workers does not change—only the allocation between the medical and family leave portions is adjusted.

What employers should do now

Although no immediate payroll or contribution changes are required, employers with employees in Washington should consider the following steps:

  • Review communications from ESD regarding the new premium split as they become available later in 2026
  • Consult with tax professionals to understand any residual tax implications related to PFML premium contributions
  • Prepare payroll and HR teams for changes to the premium allocation that will take effect in 2027
  • Ensure third-party payroll providers or absence management vendors are aware of the upcoming changes

View more Absence Management updates on the Absence Management Bulletins page.

NOTICE OF DISCLAIMER

Neither Hub International Limited nor any of its affiliated companies is a law or accounting firm, and therefore, they cannot provide legal or tax advice. The information herein is provided for general information only and is not intended to constitute legal or tax advice as to an organization’s specific circumstances. You should consult an attorney, accountant or other legal or tax professional regarding the application of the general information provided here to your organization’s specific situation in light of your organization’s particular needs.