Most coverage of Minnesota’s Paid Family and Medical Leave (PFML) Act focuses on the default state-run plan—but few are talking about the alternative option available to employers: using private insurance instead of paying the full state payroll tax. For many Minnesota businesses, this lesser-known path could offer both cost savings and greater flexibility, especially for those already offering disability-related benefits.
Although benefits under the PFML won’t begin until January 1, 2026, here’s what Minnesota employers need to understand—and why shopping for insurance now in 2025 may be your best move.
What Is the Minnesota Paid Family and Medical Leave Act?
Minnesota’s PFML provides up to 12 weeks of paid family leave per benefit year and up to 12 weeks of paid medical leave per benefit year with a maximum of 20 weeks if the employee experiences multiple qualifying events, such as:
- Medical leave for an employee’s own serious health condition
- Bonding leave for the birth, adoption, or placement of a child
- Family caregiving leave
- Leave related to a family member’s military service
- Safety leave for victims of domestic abuse or sexual assault
To fund this benefit, employers and employees must begin making payroll contributions effective January 1, 2026. The contribution rate will be 0.88% of each employee’s wages, split between employer and employee, up to the Social Security wage base ($183,600 in 2026). The employer must fund at least half of this amount, with the balance coming out of the employees’ pay through payroll deduction. The employer has the option of making a “pick-up contribution” of all or part of the employee’s half of the employee’s premium responsibility.
Two Compliance Options Under the PFML
Under Minnesota law, employers have two ways to comply with the Paid Family and Medical Leave Act:
Option 1: Enroll in the State-Run Program
Most employers default into the state-administered PFML program. The state will handle benefit disbursement beginning in 2026, and employers must coordinate with state leave claims and maintain job protections for eligible employees.
Option 2: Apply for a Private PFML Insurance Plan
Minnesota also allows employers to opt out of the state plan—if they secure private insurance that offers equal or better benefits. These plans must be approved by the Minnesota Department of Employment and Economic Development (MnDEED). Private insurance may be a cost-effective alternative for many employers.
Private Insurance vs. State Tax: An Alternative Path for Minnesota PFML Compliance
Private insurance carriers, especially those already offering short-term disability or long-term disability coverage, are rolling out PFML-compliant plans for Minnesota employers. Currently, the state has a list of 19 Approved Equivalent Plans. These policies meet or exceed the state’s requirements and may offer several key advantages:
- No State Payments, although employers must still submit quarterly wage reports to the state.
- Potential for Lower Contribution Rates than the state plan based on industry experience workforce demographics, claims history, etc.
- Simplified Integration with existing short-term disability insurance benefits.
- Flexibility in Coverage may offer employees with better wage replacement and greater job protection than the state program.
- Ease of Administration allowing employers to manage claims internally or through a third-party administrator, which may result in quicker processing, a more personalized experience, and better communications compared to the state-run system.
Even if your business doesn’t currently offer short-term disability insurance, private PFML coverage may still provide a lower-cost compliance option, especially when evaluated against your workforce’s expected benefit usage.
However, not all employers (and their employees) will get a break on the contribution rates. Some industries with higher risk profiles, such as healthcare, construction, manufacturing, hospitality, education, and retail may see private insurance premiums that exceed the state contribution rate.
Coordinating with Short-Term and Long-Term Disability Benefits
Employers that offer short-term disability insurance should get a break on short-term disability premiums because the PFML benefits will offset the equivalent benefit payable under a short-term disability policy. This is regardless of whether the employer opts for the PFML policy or the state program. Here’s a common strategy:
- Supplement or replace short-term disability insurance with a PFML-compliant private plan
- Shorten the waiting period on long-term disability policies to 90 days
- Let long-term disability coverage begin where PFML ends
This approach aligns your benefit timeline and avoids double-paying for overlapping leave coverage.
Why Higher-Wage Workforces May See the Greatest Savings
Minnesota’s state-run program uses a flat tax rate and doesn’t adjust for industry or income level. But private insurance carriers do. In states that already have paid family leave programs, experience shows that:
- Higher-wage earners are less likely to use paid leave (due to partial wage replacement formulas)
- Industries with higher average salaries often qualify for lower insurance premiums
- Businesses with low expected leave utilization can save substantially with private plans
By contrast, the state’s payroll tax rate is fixed, regardless of whether your team actually uses the benefit.
Tax Implications for Employees
One of the benefits of disability insurance is, if the premium is paid by the employee through payroll deductions, it is in after-tax payment and benefits paid on claims made under the policy are non-taxable. This is a particularly good benefit, because disability insurance payments are always less than the income those payments replace, usually 60%.
Under Minnesota’s PFML program, employee contributions are included in the employee taxable wages and reported on the employee’s Form W-2. These contributions may be deducted as state income taxes, but only if the employee itemizes deductions. Employer contributions made on behalf of employees are also treated as taxable wages.
As for the benefits, regardless of whether the employee pays a portion of the premium, Family Leave Benefits are taxable income (although not subject to Social Security or Medicare taxes). Medical Leave Benefits are partially taxable, depending on the percentage of the employee’s premium contribution. The portion attributable to employee contributions is excluded from income and the portion attributable to employer contributions is included in income and subject to employment taxes.
The IRS has yet to issue a definitive ruling on whether FML benefits provided under a private insurance policy and funded entirely by the employer will be taxable.
Practical Next Steps for Minnesota Employers
Here’s what your HR or executive team should do now:
- Start gathering quotes from qualified PFML insurance carriers
- Evaluate your current short-term and long-term disability coverage
- Model the total cost of state plan participation vs. private insurance
- Prepare to submit a private plan application to MnDEED (guidance is expected later this year)
- Draft employee communications explaining how your PFML plan will work
Need Help Navigating PFMLA Compliance and Insurance Strategy?
At Avisen Legal, we’re already advising Minnesota employers on:
- Paid Family and Medical Leave Act compliance
- Preparing PFML policies and procedures and revising employee handbooks
- Preparing employee communications (due by December 1).
- Internal rollout strategies for HR teams
Questions about Minnesota’s PFMLA or the private insurance option?
Contact Avisen Legal to start a conversation with an employment law attorney who can help you evaluate your options and reduce unnecessary costs.
