TOP TIP: Leave Donation Programs – Complying with IRS Requirements
The current COVID-19 crisis has had a significant impact on many employees who have had to take leave for COVID-19-related reasons. While the Families First Coronavirus Response Act provides paid leave to certain employees, and some states and local jurisdictions have implemented specific COVID-19 paid leave requirements, in addition to existing employer paid leave programs, there will be some employees who do not have or have exhausted paid leave to cover their COVID-19-related absences. One option to assist these employees is a leave donation program, but employers should recognize that such programs raise tax issues for their employees – both donors and recipients. The Internal Revenue Service (“IRS”) has set forth guidance, stating that employees will not be taxed upon donating leave to other employees so long as the donation is made pursuant to a “bona fide” plan. The bona fide plans the IRS recognizes are (1) medical emergency leave sharing plans, and (2) major disaster-leave sharing plans – both of which may be applicable in the COVID-19 context.
- Medical Emergency Leave Sharing Plans
In a 2007 Private Letter Ruling, the IRS stated that a specific employer’s donation program was tax-free to donors where the plan allowed eligible employees to request additional leave if they suffered a medical emergency. The plan defined a “medical emergency” as a “major illness or other medical condition that requires a prolonged absence from work, including intermittent absences that are related to the same illness or condition.” The plan also allowed employees to request leave to care for a spouse or child that suffered a medical emergency. Lastly, leave could be requested following the death of a parent, spouse, or child. The employer’s plan additionally maintained a strict procedure. Before employees could request leave, they were required to exhaust all paid leave. Then, the employee had to submit a written request and authorization form, describing the medical emergency. The plan also contained the amount of paid leave that could be surrendered by the donor and had rules for how the surrendered paid leave would be granted to eligible recipients.
To ensure your donation plan meets the IRS’ framework, we recommend you use an identical definition of “medical emergency” and limit the definition of family member to spouses, children and parents. We also recommend you utilize a similar procedure to ensure that donors are not taxed. If a donor and recipient have different pay rates, IRS guidance states that the leave time should be converted to reflect the recipient’s pay rate. For example, if a donor is paid $15/hour and surrenders eight hours of paid leave to an employee that is paid $10/hour, the recipient will receive twelve hours of paid leave, paid at $10/hour.
- Major Disaster-Leave Sharing Plans
A leave donation program also may be used for situations where employees are affected by “major disasters.” The IRS’ Notice 2006-59 states that donors do not incur gross income when they deposit leave into an employer-sponsored leave bank for employees who need assistance after suffering from a presidentially declared major disaster.
A “major disaster” under Notice 2006-59 is defined, in relevant part, as a situation declared a major disaster by the President of the United States under Section 401 of the Robert T. Stafford Disaster Relief and Emergency Assistance Act (which generally requires the Governor of each state to separately request the President to make such a declaration). All 50 States have been approved for disaster reliefs under this Act (this link provides pertinent information).
Under Notice 2006-59, leave sharing for major disasters must meet the following conditions:
- The leave-sharing plan is for employees who have been adversely affected by a major disaster, as declared by the President of the United States. An employee is adversely affected if the disaster has caused severe hardship to the employee or a family member that requires the employee to be absent from work.
- An employee who donates leave may not designate its use by a specific employee.
- An employee may not donate more leave in a given year than she normally accrues for the year.
- A recipient may receive leave at her normal rate of compensation.
- A recipient must use the leave for purposes related to the major disaster.
- The plan must adopt a reasonable limit on how long after the disaster leave deposits may be made to the plan and leave may be used by recipients. The period must be based on the severity of the disaster.
- A recipient may not convert leave received under the plan into cash in lieu of using it.
- The employer must make a reasonable determination, based on need, as to how much leave each approved recipient may receive under the plan.
- Leave deposited on account of one disaster may be used only for employees affected by that specific disaster.
Following IRS guidance and precedent, leave donors will not be taxed if the donation plan meets one of the two exceptions outlined above. However, recipients are always taxed. If the plan does not meet one of the two exceptions, both the donor and the recipient will be taxed. Further, donors are not permitted to take the charitable tax deduction upon donating leave because employee-recipients are not qualified charities. Employers should also ensure that the plan is applied uniformly to avoid claims of discrimination.
With regard to COVID19, absent further guidance from the IRS, medical emergency benefits will not be available to employees or family members absent a need for a prolonged absence from work as a result of a COVID19-related medical condition. Absences resulting from a decision to self-quarantine, even pursuant to a recommended order from State Governors, would not appear to qualify. Major disaster-related relief may be available based on the approved disaster order where the absence from work causes the requisite hardship.