A New Maine Payroll Tax to Fund Family Leave

By Joan Smith September 8, 2023

Co-authored by Stanley Rose

Among other legislation related to the State’s budget negotiations, SP 800/LD 1964 was signed into law recently by Maine Governor Janet Mills. It (1) created a mandatory, new, government-run family leave program, and (2) imposes a new tax on many employers and employees to fund the new program. In doing so, Maine joins around a dozen other states in offering such plans, but appears to surpass them in terms of the plan’s generosity. Other states’ programs, bordering state New Hampshire’s for instance, are voluntary and were implemented without creation of a new tax.

There are a number of features of this new tax and the plan it will fund that are not yet known, because the legislation leaves many of the details to the Department of Labor (“DOL”) to develop via administrative rules, and that process has not yet been completed. Here is what we know:

Who does the legislation apply to?

The legislation applies, directly or indirectly, to nearly every employer in the state (including the state government itself, but excluding the federal government). Employees are covered once they have earned at least 6 times the state’s average weekly wage during the 4-quarter period prior to the program’s plan year. The average weekly wage currently is approximately $1,000, meaning employees that reach around $6,000 in wages in the previous year must be covered.

The law divides employers into three categories, each with their own responsibilities regarding provision of family leave benefits for their employees:

1. Employers who offer (or will offer) a private family leave program to their employees, with terms comparable to those in the state-run program, as ascertained and approved by the DOL,
2. Employers without a private program, who employ 15 or more employees, and
3. Employers without a private program, who employ fewer than 15 employees. (This includes self-employed individuals.)

How is the plan funded? What does it cost, and when does it begin?

The plan is paid for by a tax of 1% of wages, not including bonuses. (Technically the legislation provides that the tax may be “not more than” 1%, but few expect to see the finalized rules that call for less than 1%.) Premiums are payable quarterly, and withholding first applies to wages paid beginning January 1, 2025. The premiums are subject to annual increases beginning in 2028. However, rather than a cost of living increase, the DOL will increase the tax to a level equal to 140% of the prior year claims plus 100% of the program’s administrative costs.

Although funding begins a year earlier, employees must wait until 2026 to file claims and receive benefits under the program.

Employers’ specific withholding and funding responsibilities depend on their placement within the categories described above:

1. Employers who offer DOL-approved private family leave programs of their own are not required to remit “premiums” (the new tax created by the new legislation). The rules that the DOL will create may, however, require employers to enhance their existing plans if they want to be exempt from the funding requirements of the new state-run program.
2. Employers without an approved private plan who employ 15 or more employees must remit a tax of 1% of employees’ wages to the state, representing the full amount of the plan’s premium. At the employer’s discretion, up to half of that 1% may be withheld from the employee’s wages, with the other half funded by the employer. (In other words, the full amount of the premium is due to the state, and the employer and employee split the cost of the premiums.)
3. For employers without an approved private plan who employ fewer than 15 employees, only half of the “normal” premium is payable to the state, and the full amount of it may, at the employer’s discretion, be withheld from employees’ wages. (By example, during years in which the premium for large, 15-or-more employers is 1%, the smaller, fewer-than-15 employee employers instead owe a premium of only 0.5%.  Also, that full amount may be deducted entirely from employee wages, leaving the employer with only administrative and filing duties, but no net cash burden of its own.)

Sole proprietors, such as single-member LLC owners, are subject to this rule even if they have no true employees. Instead, the proprietor is treated as his or her own employee, and the 0.5% tax will apply to that person’s self-employment income in lieu of wages.

What benefits does the program provide?

The program provides up to 12 weeks of paid leave to each employee per year, and this time “stands on its own.” The legislation prohibits employers from compelling an employee to first exhaust sick time, vacation time, or other personal time prior to utilizing the 12 weeks of family and medical leave. However, employees may utilize leave under both the new plan and an existing sick time plan, and although each plan may come with its own 12 week cap, the employee is limited to 12 weeks in aggregate, rather than 12 from each for a total of 24.

Although entitled a “Family and Medical Leave” program, the benefits extend beyond family and apply to more than what many would view as pure medical needs.

Relationships

It provides paid leave applicable to conditions directly afflicting the employee, as well as leave to allow the employee to care for family members, which is defined very broadly to include spouses, partners, siblings, parents and grandparents, children and grandchildren, and others. It applies to adoptive or foster relationships, and also extends to any individual with whom the employee has a “significant personal bond” similar to a “family relationship, regardless of biological or legal relationship.”

Conditions

The conditions that may trigger eligibility for paid leave include health conditions (of the employee, family, or qualifying friends), and bonding with the employee’s newborn child, or one recently placed under foster care or adopted by the employee. It also includes “safe leave,” which relates to an employee or a family member who is the victim of violence, sexual assault, or stalking. It covers time spent seeking orders for protection, obtaining medical or mental health counseling, securing one’s home, and seeking legal assistance to protect the victim from these risks. It also includes a feature designed to benefit military families, by allowing time off related to a call to active duty, care for a family member, attending military events and ceremonies, funeral arrangements, or rest and recuperation following return from deployment.

Amount of coverage

When a claim is paid, the amount due to the covered employee per week is computed in two steps:

The portion of the employee’s income that doesn’t exceed 50% of Maine’s average weekly wages (around $1,000) is replaced at 90% of that amount. The amount of an employee’s income that exceeds that 50% level is paid at 66%.

Example: An employee who normally earns $1,200 per week would receive weekly benefits totaling $912 ($500 X 90% plus $700 X 66%).

The state’s average weekly wages will be computed and publicly communicated on a regular basis.

Guaranteed return to employment

Employees who have been employed for at least 120 days prior to taking leave must, upon return from leave, be restored to the position once held, including level of pay, benefits, and other terms of employment.

Employees who have been employed for fewer than 120 days prior to taking leave do not receive that same guarantee. However, the legislation, with very little elaboration, prohibits retaliation against an employee who takes a leave; and it directs the DOL to take enforcement action against employers for violations.

Observation: Perhaps forthcoming DOL administrative rules will provide more clarity, but these standards could be construed to put employees with fewer than 120 days of employment on effectively equal footing with their more tenured colleagues, because loss of pay or position could be deemed to constitute retaliation.

Taxability

The legislation does not opine on whether the benefits paid under this program will be subject to federal income tax. It seems likely that it will be federally taxable, although it is possible that specifications that materialize in the DOL rules that follow could alter that. These benefits, though, are explicitly exempt from Maine’s own individual income tax.

Questions – answered and unanswered

The statutory language covers a lot of ground, but it can raise a few questions for employers who understandably may be concerned with any changes that can lead to staffing concerns that some have found to be already persistently elevated following the pandemic. Among them:

Can an employee effectively be on leave for 24 weeks (nearly half of a year) if the leaves of two plan years are taken back-to-back? Do the rules address an employee who begins leave and then is unable or chooses not to return to work following the end of the leave? Is there any repayment requirement? For employers who choose to utilize a private plan in lieu of the state-run plan, what is the process for receiving approval of that plan?

None of these questions appears to be clearly answered in the statutory language. A 24-week leave appears to be permissible, if one leave ends on December 31 and the other begins the following day. The characteristics that a private plan must offer are listed in the legislation, and they closely parallel the specs of the public plan, but the application process itself has not been described. It is reasonable to assume that questions like this will be addressed in the administrative rules that DOL is charged with developing.

Miscellaneous/conclusion

The text of the legislation is not exactly light reading, but those interested in perusing it can find it on the state legislature’s website. The law consists of two pieces:

1. The original bill: D. 1964/S.P. 800, and
2. Its Committee Amendment: C-A S-385.

As mentioned above, the legislative language will be supplemented by administrative rules drafted by the Department of Labor. Those rules undoubtedly will explain how employees will file a claim, and will lead to the creation of various forms related to submission of tax and claims applications. We will share more information once the DOL provides their additional guidance. With withholding from wages playing a prominent part in the funding, it is likely that payroll service providers will be at the forefront of implementing this plan on employers’ behalves.

In the meantime, employers and employees alike should be aware that this program has been set in motion. Employees will have far more options for spending time addressing family matters without concern for loss of employment or significant loss of pay, in exchange for tax withholdings that will put a dent in their take-home pay. Employers, depending on size, will need to fund a new quarterly tax and be prepared to reserve a position of employment, perhaps to go unstaffed or staffed on a temporary basis during the employee’s absence, with the understanding that there are likely to be more such absences than there were in the past.

For more information, please contact Joan Smith, Stanley Rose, or your BNN tax advisor at 800.244.7444.