Oregon Employment Department officials told the Senate Interim Committee on Monday that a recent IRS revenue ruling changes how Paid Leave Oregon must treat employer‑funded portions of medical leave benefits for federal tax purposes and that the department recommends an accounting method to comply without imposing new payroll‑tax burdens on employers or claimants.

Acting Paid Leave Oregon Director Juan Serratos explained that the IRS ruling requires amounts funded by employer contributions that pay medical leave to be treated as wages for payroll‑tax purposes and reported on a W‑2 rather than the program’s prior 1099‑style reporting. "Employers could owe taxes on benefits they did not issue. Claimants could receive lower take‑home benefits because they will also need to pay taxes on those benefits," Serratos said, summarizing the potential consequences.

The department presented two compliance paths. The payroll‑tax method would continue to fund medical benefits with employer contributions but would require collecting and remitting payroll taxes and a substantial system rewrite; the department estimated roughly $5.6 million in one‑time administrative setup costs and roughly $20 million annually in ongoing tax liabilities under that approach. The accounting method would instead tag contributions by source (employee vs. employer) and pay medical benefits from funds identified as employee contributions, avoiding employer payroll taxes and claimant tax hits if employee‑contribution balances suffice.

Serratos told the committee that employee contributions currently account for about 60 percent of program revenue while medical claims represent about 54 percent of costs, and that modeling suggests the accounting method would have sufficient employee‑sourced balances to pay medical leave without creating additional tax liabilities. The department said it coordinated with the Oregon Department of Justice and with other states pursuing similar approaches, and that it has asked the IRS for an implementation extension to Jan. 1, 2027.

OED Director Andrew Stolfi said the accounting method requires a small statutory change in the 2026 session to allow the agency to allocate trust‑fund contributions by source and leave type, modest accounting and limited system programming changes, and administrative rules changes. The department and its advisory committee favor the accounting method as the path that protects claimants and employers while keeping program service quality intact.

The committee did not take formal action. Staff indicated they will bring draft statutory language for committee consideration and, if stakeholders reach agreement, pursue a committee bill in the short session.