Due to the pandemic some of your employees may have exhausted their paid leave and be in desperate need of more. Some of your other employees may have a surplus of accrued paid leave and want to assist their less-fortunate co-workers. While you can technically allow employees to “give” accrued paid leave to each other, the IRS says that you have to jump through some hoops if you don’t want the donor employees to take an unnecessary tax hit.
IRS Notice 2006-59 addresses this issue. You can find the Notice here: https://www.irs.gov/pub/irs-drop/n-06-59.pdf. The IRS also recently also published a brief Q&A addressing such plans related to the COVID-19 pandemic. You can find the Q&A here: https://www.irs.gov/newsroom/leave-sharing-plans-frequently-asked-questions
If the employer follows the IRS Notice, the employee who gives leave under such a plan will not have to include the donated leave in her income or wages. Conversely, the employee who receives the “given” paid leave will be taxed on the amount that she receives. Unfortunately, the employee giving the leave may not claim an expense, charitable contribution, or loss deduction for the amount of leave given. Please note that I said that this works “If the employer follows the IRS Notice.” If you fail to do so, your employees will face some unexpected taxes on the paid leave that they “gifted.”
I would recommend that you refer to Notice 2006-59 if you are considering implementing such a leave-sharing plan. I have summarized some of the key criteria below:
- The plan must allow a leave donor to deposit accrued leave in an employer-sponsored leave bank for use by other employees who have been “adversely affected by a major disaster” as defined by the Notice.
- The plan cannot allow a leave donor to deposit leave for transfer to a specific leave recipient. (This has been a major point of contention with the plans that I have assisted clients to implement. Most employees want to give leave to a particular co-worker, not to all eligible co-workers in general. Consider this before you spend your time and money drafting a plan.)
- An employee cannot take more leave in a year than the maximum amount that she accrued in the year.
- A leave recipient must use this leave for purposes related to the major disaster.
- The plan must have a reasonable limit on the period of time that leave may be deposited and received from the bank.
- A leave recipient cannot convert leave received into cash. (This is another common point of contention.)
- The employer must make a reasonable determination, based on need, as to how much leave each approved leave recipient may receive under the leave-sharing plan. (Ouch! This will undoubtedly lead to cries of favoritism.)
- Leave deposited on account of one major disaster may be used only for employees affected by that major disaster. (If you implement a plan for COVID-19, it could not also be used for our next hurricane.)
- Unused leave must be returned to the donor.
Don’t hesitate to call me directly if you have any questions or would like assistance in drafting and implementing your own COVID-19 Leave Sharing Plan.