Employee Leave-sharing and Donation Programs

• Employers may establish paid leave- sharing or donation programs to allow employees to help those in need.
• Leave sharing allows employees to donate their paid leave to other employees.
• Leave donation allows employees to exchange their paid leave for charitable contributions.

• Unless the program meets IRS guidelines, the donated leave will be taxable to the donor employees.
• The IRS has approved leave sharing for medical emergencies and major disasters.
• The IRS has approved leave donation for specific events, including Hurricane Matthew.

Employer-sponsored leave-sharing programs allow employees to donate some of their accrued paid leave time, such as paid time off (PTO), vacation or sick leave, for the benefit of other employees who are in need of additional paid leave.

Employer-sponsored leave-donation programs allow employees to forgo their accrued paid leave in exchange for cash donations that the employer makes to charitable organizations.
While these programs can be beneficial to both employers and employees, they need to be carefully structured in order to avoid negative tax consequences for the employees who donate their unused paid leave. The Internal Revenue Service (IRS) has issued guidance on specific types of leave-sharing and donation programs that do not trigger tax consequences for donor employees.

In addition to the tax issues, employers should be aware of other possible areas of concern when considering a leave-sharing or donation program, including the potential cost implications of these programs and privacy concerns.

Links And Resources

• IRS Notice 2006-59 (leave sharing for major disasters)
• IRS Notice 2016-69 (leave donation for victims of Hurricane Matthew)
• IRS Notice 2016-55 (leave donation for victims of Louisiana storms)

Leave-Sharing Programs

Employer-sponsored leave-sharing programs provide employees with the opportunity to donate their accrued PTO, vacation or sick leave for the benefit of other employees who are in need of additional paid leave time. Typically, an employer establishes a leave-sharing “bank” to track the donated employee leave. Employers should determine in advance what criteria must be met in order for an employee to use the donated leave. Employers should also require employees to submit an application to use the donated leave and implement a process for determining whether an employee’s application satisfies the program’s criteria.
Leave-sharing programs can be advantageous to both employees and employers by enhancing employee morale and camaraderie in the workplace while also reducing employee turnover and productivity losses. However, these programs need to be carefully structured in order to avoid negative tax consequences for the employees who donate their accrued leave.

Leaving-sharing for Medical Emergencies

According to the IRS (Revenue Ruling 90-29), a leave-sharing program that allows donated leave to be used only for medical emergencies results in taxation to the leave recipients, and not to the leave donors.  The leave-sharing arrangement that the IRS reviewed involved these main components:

• Employees requesting the additional leave are required to submit a written application describing the medical emergency to the employer.
• After the application is approved and the employee exhausts all of his or her paid leave, the employee is eligible to receive paid leave (at his or her normal rate of compensation) donated by other employees.
• The arrangement restricts the amount of leave that can be donated and contains rules regarding how the leave will be granted to leave recipients.  

The IRS concluded that amounts that the employer paid to a leave recipient under the program were includible in the recipient’s gross income for federal tax purposes and also subject to income and employment tax withholdings. The IRS also cautioned that its guidance only applies to bona fide employer-sponsored leave-sharing programs.

“Medical Emergency” Definition: Under the program considered by the IRS, a “medical emergency” was defined as a medical condition of the employee (or family member of the employee) that would require the prolonged absence of the employee from duty and would result in a substantial loss of income to the employee because the employee would have exhausted all paid leave available (apart from leave that is available under the leave-sharing plan).

Leave Sharing for Major Disasters

The IRS has also indicated (Notice 2006-59) that a leave-sharing program that allows donated leave to be used only for employees adversely affected by major disasters results in taxation to the leave recipients, and not to the leave donors.  A “major disaster” means a major disaster that is declared by the president of the United States.
According to the IRS, a major disaster leave-sharing program is a written program that meets all of the following requirements:

Programs that do not meet these specific requirements may cause the donated leave to be taxable to the leave donor (and not the recipient). For example, in a private letter ruling from 2007, the IRS ruled that an employer’s program that allowed leave donations for employees who experience “catastrophic casualty losses” due to a terrorist attack or natural disaster would result in taxable income to the leave donors because the program was not limited to helping employees adversely affected by a major disaster.

leave-donation programs

Under employer-sponsored leave-donation programs, employees can elect to forgo their accrued PTO, vacation or sick leave in exchange for cash donations that the employer makes to charitable organizations.

General Tax Rule: The same general tax rule that applies to employee leave-sharing programs also applies to these programs—the donated leave is taxable to the employee who donates it. Thus, unless an exception applies, the value of the donated leave must be reported on the donor employee’s Form W-2 and is subject to income tax and employment tax withholding. However, because the value of the paid leave is donated to a charitable organization, the donor employee may claim a charitable contribution deduction for the donated amount on his or her taxes.

From time to time, the IRS recognizes limited exceptions to this general tax rule for donations that employers make to charitable organizations, as described in Section 170(c) of the Internal Revenue Code (Code), in response to specific situations. When an exception applies, the donated leave is not taxable to the donor employees. Similarly, employees who donate the leave may not claim a charitable contribution deduction with respect to the value of the donated leave that is excluded from their compensation and wages. 

The IRS most recently provided tax relief for employer-sponsored leave-donation programs to aid victims of Hurricane Matthew and the victims of the severe storms and flooding in Louisiana in August 2016 (Louisiana storms).

• Hurricane Matthew: IRS Notice 2016-69 provides that any cash payments that an employer makes to charitable organizations before Jan. 1, 2018, in exchange for paid leave donated by employees are not taxable to the donor employees if the payments are made to the charitable organizations for the relief of victims of Hurricane Matthew.
• Louisiana Storms: IRS Notice 2016-55 provides that any cash payments that an employer makes to charitable organizations before Jan. 1, 2018, in exchange for paid leave donated by employees are not taxable to the donor employees if the payments are made to the charitable organizations for the relief of victims of the Louisiana storms.

other design considerations

In addition to the tax issues associated with employee leave-sharing or donation programs, employers that are considering these types of programs should also take into account the following design issues:

• State Leave Laws: When structuring an employee leave-sharing or donation program, employers should also consider any state or local leave law requirements that may impact the program’s design. These laws may have implications regarding an employee’s right to various types of paid leave (for example, sick leave). Employers should consider consulting with legal counsel on the implications of state and local leave laws.
• Increased Costs: Employers should consider the possible cost increases associated with employee leave-sharing and donation programs. For example, if an employer has a “use-it-or-lose-it” policy for paid leave, and an employee donates leave that would otherwise have been forfeited under that policy, it will add to the employer’s costs if the donated leave is used by another employee (or if the value is donated to a charitable organization). There are also cost implications if higher-paid employees use more of the donated leave time (which has been donated by lower-paid employees), and the leave is paid at the recipient employee’s pay rate.

To help control costs, employers should consider their options for valuing donated leave, including an approach that values leave at the rate it is donated rather than at the rate it is used. Under this type of approach, for example, if an employee who has an hourly rate of $30 donates two hours of paid leave, that leave is valued at $60. It would equal, for example, four hours of paid leave for an employee who makes $15 per hour, but just one hour of paid leave for an employee who has a rate of $60 per hour.   

• Donation Limits: Employers often place caps on the amount of unused paid leave that can be donated and the amount of donated leave that an employee may use. These caps can help control costs, while also ensuring that donor employees still have enough paid leave for their own purposes.
• Discrimination Claims: To help avoid discrimination claims, employers should make sure that a leave-sharing program’s eligibility criteria are applied uniformly to all employees in a nondiscriminatory manner.
• Privacy Concerns: Employers should also make sure that employees’ privacy is protected when health or medical issues are involved. Leave-sharing and donation programs are not subject to the privacy rules under the Health Insurance Portability and Accountability Act (HIPAA). However, employers with 15 or more employees are subject to the confidentiality requirements of the Americans with Disabilities Act (ADA).

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