Beginning on October 1, most employers in Massachusetts will be required to withhold tax to fund Massachusetts Paid Family and Medical Leave benefits. There is an exception to this requirement, however, for companies that receive a tax exemption from the state for a private plan providing the same or better benefits. Many employers have already chosen to apply for a tax exemption, after comparing the cost of the tax to the likely cost of implementing a private plan. Some companies are requesting exemptions from part or all of this tax because for them, it is cheaper to pay for the benefits directly or through short and long-term disability plans already in place. Others have chosen to obtain tax exemptions for 2019 and 2020 only, with the intention that they will join the state plan in 2021 and begin withholding taxes then. (Because benefits under the program are not payable until 2021, an employer with a two-year tax exemption reaps an immediate savings while shifting the risk of paying benefits to the state, beginning in 2021.) Still others want a tax exemption because their own program for paid leave is better than what the state generally offers, and they do not want to pay into the public program.
Whether your company should apply for an exemption from the tax depends on a number of factors. For example, the cost of obtaining the tax exemption versus the tax savings is one factor to consider. Another is the employer’s projected out-of-pocket cost of providing paid leave benefits privately versus the tax expenditure. Projecting an employer’s private cost of paid leave means taking into consideration the cost of its existing short and long-term disability programs, and, considering the demographics of its employees and eligible contractors, the likelihood of future leaves. Certain factors affecting the cost to the company, such as the health of employees’ family members, will be unknown and cost assumptions will need to be built into the analysis.
Whether a company should seek an exemption from the new tax depends on factors particular to each employer. In-house counsel should consider the above factors as a starting point for deciding whether paying the tax or seeking an exemption is a better path or the business.
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