DENVER — While Coloradans continue to see their purchasing power diminish due to a rising cost of living, many will soon experience an additional financial squeeze with a new .45 percent deduction from their paychecks beginning in January.
The “Family and Medical Leave Insurance” (FAMLI) program, which was passed by voters in 2020, will begin collecting payments through employers’ payroll in January, but those eligible for the benefit won’t be able to file a claim until 2024.
What is FAMLI?
FAMLI is an employee and employer funded, state-managed insurance benefit for up to 12 weeks (16 weeks for pregnancy or birth complications) of paid leave for employees after being employed for more than 180 days and earning at least $2,500 in wages in Colorado.
FAMLI can be used for a variety of things such as the care of a new child, themselves after an injury or serious health condition, care of a family member, plan for a family member’s military deployment and to address the safety needs resulting from domestic violence or sexual assault.
Benefits will not be taxed at a state level, but the Internal Revenue Service has not decided on whether they are taxable at the federal level, so anyone using the benefits will get a 1099-G from the state for “unemployment compensation.”
Who is affected?
All workers whose employer does not offer a compatible program are required to pay .45 percent of their annual wages into the plan, regardless of if ever used. That amounts to $225 per year on a $50,000 salary. Employers are required to match the employee’s .45 percent for a total of .9 percent contribution per pay period. Employers with nine or fewer employees do not have to match the .45 percent, but the employees will still be required to pay their share.
However, the .45 percent is only guaranteed for the first two years of the program, as the law allows for hiking the deduction without going back to voters. In 2025, the director of the program will reassess and determine if increases are needed based on usage. The maximum amount is capped at 1.2 percent of wages, or $1.20 for every $100 earned.
Can I opt out?
Employees in the private sector cannot opt out. There are a few exceptions on the employee deductions:
- Federal employees cannot receive state benefits, so they will not see the wage deduction.
- Those whose employers have chosen to cover the employee’s portion of the new tax will not see the wage deduction.
- Employees whose employers have opted out of the program because they offer a program similar to FAMLI won’t see the state wage deduction, but could see other deductions based on how the employer funds its program.
- FAMLI is optional for self-employed workers; however, they must agree to participate for three years if they choose to.
What if I work for the government?
The full rules and implementation of the program are not finalized, but state statute allows only local governments to monitor the success of the program before committing. They are the only employers that have the option to participate or opt out. Local governments are defined as any city, county, town, school district, special district (such as fire and libraries) or other political divisions of the state.
Governments have until the end of the year to determine if they wish to participate. Local governments that do not declare their intent by January 2, 2023, will be automatically enrolled in the plan and payments will be due in April.
According to a representative at the Office of Government, Policy & Public Relations, to date, about 84 percent of local governments who have completed the registration process have opted out; 699 have registered, 585 have opted out and 114 are participating in FAMLI.
In early December, for example, the Broomfield City Council voted 7-1-1 to opt out, and will re-evaluate the program before January 2024.
Additionally, if a local government chooses to opt out by the end of 2022, and then opts in at some point, those employees will be required to pay into an initial one-year waiting period before being eligible for benefits.
Governments must readdress their decision at minimum every eight years, and if they choose to participate, they must do so for at least three years before they can opt out.
Once a government has chosen to opt out, individual employees can choose to participate anyway after benefits begin in 2024. They will only be responsible for the .45 percent portion of the program, and they will be required to commit for three years.
Additionally, should a government worker use the program on his or her own without the employer participating, that local government is not required to maintain health insurance benefits for the employee while the employee is on leave. Likewise, the employee would not have job protection if they chose to take leave.
But will it work?
A study done by the Common Sense Institute found that FAMLI is likely to go bankrupt in just its second year of claim eligibility.
The report says the direct costs of the program have not yet been fully explored.
“While it acknowledges that utilization will likely increase over time, it offers no future year estimates,” the report reads. “And importantly the legislation does not include provision to reduce benefit levels in the event the cost continues to increase.”
Most notably the report concluded:
- If the program starts with a claims rate of 6.2 percent and an average length of leave at 9.5 weeks, the premiums collected in 2023 will not be sufficient to cover the cost in the first year of the program.
- In 2025 if the premium increases to it’s maximum of 1.2 percent, the program can grow only to 7.5 percent usage with an average leave length of 10.2 weeks. Futher legislative action would be required increasing the premium or reducing the benefits to continue the program.
- It will cost the state government, which is required to participate in the program, between $39 and $94 million a year in additional benefits cost.
- Total premiums in 2025 could total more than $1.3 billion — a 204 percent increase in corporate income tax.
In the end, the Common Sense Institute says, the consumer will pay the price for the program as increases get passed along in the prices of goods and services.
FAMLI may also lead to lower wages, according to the report. The program can “pass on 50 percent of their employee share of the premium in the form of lower wages. This simply means that given the level of pressure an individual firm may face due to the higher costs, employees could pay up to 75 percent of the premium. … The direct cost of the premium would amount to an effective increase in personal income taxes of between 8 percent and 18 percent.”
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