You may have heard the terms “donated leave” or “leave sharing” being used within the business community over the past few years. This has been something that various companies have adopted to help boost morale, promote compassion, and support their employees.

Generally, a donated leave program allows an employee to donate accrued hours of paid vacation, personal, or sick leave (paid time off) to benefit other employees who need more leave than they have available. However, there are certain tax implications associated with implementing a program like this, and many may not know what should be included to avoid unintended consequences.

The general tax rules for leave-sharing plans require both the PTO donor and PTO recipient to be taxed on the income. Currently, the IRS has identified only two exceptions to the general tax treatment of these types of plans. The first exception allows for bona fide leave-sharing arrangements for medical emergencies, while the second exception covers leave banks for natural disasters. Employers must draft a precise and well-thought-out policy to ensure that employees receive the intended benefits of the program.

Under Revenue Ruling 90-29, employer-sponsored leave donation programs allow employees to donate unused leave to another employee who has a qualifying medical emergency or major disaster.

The amounts of leave donated are not taxable to the employee who donated them but must be considered wages for the recipient at the recipient’s salary rate. The employee donating the leave may not claim an expense, charitable contribution, or loss deduction for any leave donated.  

The IRS has provided guidance on what constitutes a bona fide employer-sponsored leave-sharing arrangement under the medical emergency exception. To be valid, a leave-sharing program should:  

• Be in writing and be administered by the employer. 
• Be created as a “leave bank” into which employees may deposit their donated leave and from which the leave will be distributed to the employees who request it. 
• Specify that leave is to be used only for medical emergencies.
• Have a procedure for employees to make a written application for leave, which describes the medical emergency or condition. The employee should be eligible to receive leave from the bank only after the application has been approved and the applicant has exhausted all available paid leave. Any leave received by the employee through the program should be paid at the employee’s normal rate of compensation. 
• Specify limits, if any, on the amount of paid leave time that may be donated annually by a given donor. 
• Confirm that the leave transferred under the donation program is actually used as medical leave by the recipient. A recipient may not receive cash.

A major disaster leave-sharing program must also be in writing and meet the following requirements:  

• The program allows a donor to deposit accrued leave into an employer-sponsored leave bank for the use of other employees who have been adversely affected by a major disaster. The program does not allow the employee donating leave to specify the leave recipient. 
• A leave recipient may receive paid leave at the recipient’s standard pay rate from leave deposited in the bank. A recipient may not receive cash instead of using the paid leave received.  
• The program places a reasonable limit on the period of time after the disaster occurs during which leave can be donated and used, based on the severity of the disaster. The leave must be used for purposes related to the specified natural disaster.
• The employer must reasonably determine the amount of leave a recipient may receive.
• Leave deposited for one major disaster may only be used by employees affected by that disaster. Leave deposited in the bank that is not used by the end of the specified period following the disaster must be returned to the donating employees. 

Certain states have additional requirements that must also be followed.

If you have any questions regarding leave-sharing programs, please contact the Zinner & Co. tax team for more information.