Leave Sharing Plans Frequently Asked Questions from the IRS - Zupnick Associates

by Corinna Underwood )

A leave sharing plan, also known as leave donation, permits employees to donate accumulated paid time off, sick leave, or vacation time to a pool form.  This time can be used by fellow employees who are going through a major disaster or medical emergency and have already used all their paid leave.

Leave sharing plans not only benefit workers, but they also benefit employers by increasing employee morale and loyalty to the company. They can also play a role in boosting productivity and engagement, improving recruitment and retention, and reducing absenteeism.

Leave Sharing Plans and Tax Laws

It is important to note that, according to general tax law, an employee who has accrued paid time off and chooses to donate it, must also pay taxes on it. This would mean that both the donor and the recipient pay taxes on the donated leave time.

However, the Internal Revenue Service (IRS) permits two exceptions in which employees can donate leave without negative consequences (Notice 2006-59). These are:

  • Major disaster leave sharing exception: This is defined as a disaster that is either declared by the president under §401 of the Stafford Act or declared by the president for federal government agencies under 5 U.S.C. §6391.

  • Medical emergency exception: This is defined as a “medical condition of the employee or a family member that will require the prolonged/extended absence of the employee from duty and will result in a substantial loss of income to the employee due to the exhaustion of all paid leave available, apart from the leave-sharing plan.” See Private Ruling Letter.

As of August 2020, the COVID-19 pandemic is considered to be a “major disaster” under the conditions of these exceptions.

Is a Leave Sharing Plan Right for Your Company?

Before you adopt a leave sharing program for your employees under the medical emergency exception, you must:

  • Present your plan proposal to the IRS in writing.

  • Have set up a pool in which employees can donate leave and from which leave may be allocated to employees undergoing a personal or family medical emergency.

  • State clearly that employees are only eligible for donated leave when they have exhausted their accrued leave.

  • Specify that donated leave is only to be used for medical emergencies.

  • Detail limits to the amount of leave that can be donated or accepted in any given year.

  • Have a procedure in place, whereby employees can request donated leave.

  • Implement a confirmation process to ensure all donated leave is being used for a medical emergency.

Leave Sharing Plans Frequently Asked Questions

Can an employer provide a leave sharing program that allows workers to donate leave to an employer-sponsored pool for use by other employees who need emergency leave due to COVID-19?

This is permissible so long as the recipients have already used their accrued paid leave time.

If an employee donates leave time to the pool, will they have any negative tax consequences?

No. The employee who donates their leave time, will not have to pay taxes on that amount.

If an employee donates leave time to the pool, can they claim a loss deduction or charitable contribution expense for the amount of the donated leave?

No. The donor cannot claim any such deductions.

When an employee donates leave time to the pool, can they nominate a specific recipient?

No. The donated leave time remains in the pool until an eligible employee applies for it and it is allocated to them.

Will accepting donated leave affect my employee insurance plan?

No. It will not affect your individual insurance or group plans.

Is there a limit on how much leave time an employee can donate?

Yes. An employee may not donate more paid leave time that they normally accrue in any given year.

Can leave time deposited for COVID-19 be used for any other major disasters?

No. Leave time that is deposited for COVID-19 emergencies may not be used by employees affected by another major disaster.

Who decides whether or not an employee is eligible to receive donated paid leave time?

The employer who set up the leave sharing plan must make a reasonable determination of an applicant’s need before deciding to allocate the paid leave to an employee.

What happens to leave time that has been donated to the pool and has not been used by other employees?

Any paid leave time that has been deposited into a major disaster leave-sharing plan that is not used must be returned to the original donors within a reasonable period of time.

If you set up a leave sharing plan to help your employees with COVID-19 emergencies, make sure that all your employees are aware of the plan and how it works. Explain to any employees that wish to apply for donated paid leave time that they do not need to have pre-approval from the IRS before requesting leave from the pool.

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