MA, MD PFML Tax rates raise new questions about Minnesota PFML Tax.
The National Federation of Independent Business is raising concerns about Minnesota Paid Family and Medical Leave (PFML) cost estimates in light of recent announcements from the Massachusetts and Maryland PFML programs.
Minnesota’s new PFML law – enacted during the 2023 Legislative Session – sets an initial tax rate of 0.7%. An actuarial study to determine the financial soundness of the program is due to the state by October 31, 2023. If the study finds the program is not financially viable at the initial tax rate, the state can raise the PFML tax up to the maximum rate of 1.2%.
“Small business owners are still trying to wrap their heads around how they’ll survive under Minnesota’s PFML mandate,” said John Reynolds, NFIB Minnesota State Director. “Minnesota’s program is more expensive and more complicated than most state PFML programs. It’s very likely that Minnesota’s PFML tax will be higher than projected.”
In September, two states announced new PFML payroll tax rates. The Maryland Department of Labor, which oversees the state’s PFML program, announced it will begin collecting an initial payroll tax rate of 0.9% in October 2024.
And the Massachusetts Department of Family and Medical Leave announced the state’s PFML tax rate will increase from 0.63% in 2023 to 0.88% in 2024 – a 40% jump.
“These developments are a red flag for Minnesota’s PFML program,” added John Reynolds, NFIB Minnesota State Director. “For years, we’ve been warning that the math doesn’t add up here. We urge state lawmakers to take a serious look at curtailing the cost and burden to small business owners and their employees next year.”
NFIB’s analysis of the expectations and experiences in Maryland and Massachusetts found that Minnesota’s PFML program design may require a payroll tax rate of 1.1% to 1.2%.
Minnesota PFML estimates differ expectations and experience in other states.
The PFML programs in Maryland and Massachusetts share a similar structure to the Minnesota program, with some notable differences that impact the cost. Among the most significant differences are less generous benefit payment structures and lower maximum weekly benefit payment levels in the other two states.
SAWW: statewide average weekly wage
Minnesota also relies on some key assumptions that differ from the figures found in Maryland’s estimates or Massachusetts’s experience.
Average Weekly Benefit Payment: The most recent version of the Minnesota PFML fiscal note did not provide an estimated average weekly benefit payment. An approximate average weekly payment of $951.32 can be inferred by dividing the estimate for the total annual benefit payments ($1.16 billion) by the estimated total annual number of leave weeks taken (1,224,342). This may be higher than the other states, in part, because of Minnesota’s more expensive payment formula and higher weekly maximum.
Average Length of Leave: Minnesota’s expectation that the average user will take only six weeks of PFML per year also differs from expectation and experience in other states. Despite a more generous benefit payment structure and cap than both states, Minnesota expects workers here to use 37% fewer leave weeks than workers take in Massachusetts and 44% fewer than workers are expected to take in Maryland.
Sources: Minnesota PFML Fiscal Note (SF 2), 4/25/2023; Maryland FMLI Fiscal & Policy Note (SB 275), 4/8/2022; Massachusetts PFML Annual Report FY 2023.
Changes in PFML benefits and utilization can result in significant financial shifts for the program.
The cost of a PFML program depends on many factors, including how many people use the program, the duration for which they use program, and how much they are paid while using the program.
Under the assumptions used in the Minnesota PFML fiscal note, a 0.7% payroll tax covers the first-year cost of the program and produces a surplus of $218 million.
However, using Massachusetts’s average leave length of 9.4 weeks and the inferred average weekly payment of $951.32 changes the total cost of the program to $1.9 billion with a deficit of nearly $442 million at a 0.7% payroll tax.
Using Maryland’s estimated average leave length of 10.7 weeks and the inferred average weekly payment of $951.32, the total cost of the program rises to $2.08 billion for a deficit of roughly $694 million at a 0.7% payroll tax.
Higher payments and/or longer leave lengths require a higher payroll tax.
The total cost of PFML benefits, administration, and operating surplus will determine the necessary payroll tax level.
In the Minnesota PFML fiscal note, the state expects the program to run a surplus of $218 million, or 18.8%, in the first full fiscal year. The surplus is the difference between revenue from the 0.7% Payroll Tax and the total cost of benefits and administration.
To realize the same surplus in the longer leave length scenarios, the payroll tax rate would need to be 1.08% to 1.23%. Even without a surplus, the tax rate would need to be 0.91% to 1.03% to break even.
A lower average weekly benefit payment and/or shorter average leave length could make the program financially viable.
- At a payroll tax of 0.7%, an average leave length of 9.4 weeks (MA), and an average weekly payment of $646.89, the program would run the same cost and surplus as the Minnesota PFML fiscal note.
- At payroll tax of 0.7%, an average leave length of 10.7 weeks (MD), and an average weekly payment of $568.30, the program would run the same cost and surplus as the Minnesota PFML fiscal note.
Minnesota’s 0.7% payroll tax would be one of the lowest among similar state PFML programs despite having among the most expensive benefit sets in the country. Only Connecticut, which does not require an employer contribution and caps the maximum weekly payment at ~$900, has a lower rate at 0.5%.
Delays, Financial Concerns Common in State PFML Programs
Washington’s PFML program has struggled with financial shortfalls since its launch in 2020. The state’s PFML payroll tax doubled in that time, from 0.4% in 2020 to 0.8% in 2023, in part due to underestimating utilization.
Oregon’s PFML program launched in September 2023, four years after the bill was signed into law and nine months behind the original expected launch date of January 1, 2023. The delays resulted from IT development challenges, pandemic-related obstacles, and other factors. Early reports indicate the Oregon program is experiencing more claims and taking in less payroll tax revenue than anticipated.
Earlier this year, Maryland lawmakers delayed implementation of the state’s PFML program, which was signed into law in 2022, by one year from 2025 to 2026.
