Leave-Based Donation Programs -- Employers and Employees Can Come Together to Support the Business Community
August 11, 2020
By Brent Lipschultz
As the COVID-19 pandemic disrupts the global economy and displaces many employees, employees have expressed an interest with their employers to donate their own paid time off (PTO) to help society and specific communities adversely impacted from the COVID-19 virus. With the establishment of a leave-based donation program, an employer can take action to mitigate the impact of the disruption on its employees, show its generosity and give back to the community in a meaningful way.
Employers generally may offer two different types of leave donation programs: (1) leave donation to an employer-designated public charity or private foundation and (2) a major disaster leave sharing program. Employees on leave for their own COVID-19 medical treatment could be beneficiaries of a medical leave sharing program; if an employee is not on medical leave, however, donating PTO to the employees would require a major disaster leave sharing program.
Leave-Based Donation Program
The IRS issued Notice 2020-46 providing favorable tax relief for “leave-based donation programs” designed to aid victims of the COVID-19 pandemic. Under these programs, employees may elect to forgo vacation, sick, or personal leave in exchange for payments that the employer makes to charitable organizations under IRC Sec. 170(c).
Cash payments made by the employer to charity under the leave-based donation program are not considered wage income to the employee, are not includible in the employee’s gross income and cannot be claimed as a charitable contribution by its employees.
Under the Notice, employees can elect to forego vacation, sick, or personal leave in exchange for cash payments that the employer makes to charitable organizations described in IRC Sec. 170(c). These payments will not be treated as wages or be included in gross income if the payments are made to organizations for the relief of victims of the COVID-19 pandemic in the affected geographic area and paid to these organizations before January 1, 2021. The IRS will not assert that an opportunity to make this election results in employees having constructive receipt of the payments. To the extent elected, the cash payments to which this guidance applies are not to be included in Box 1, 3 or 5 of the Form W-2.
Employers will be able to deduct the cash payments under the rules of IRC Sec. 170, or under the rules of IRC Sec. 162, if the employer meets the requirements of the particular section. Generally, payments made to charitable organizations pursuant to leave-based donation programs are deductible to the extent the payments would be deductible under IRC Sec. 162 if paid to the employees. For example, a deduction will not be limited by percentage limitations under Sec. 170(b)(2)(A) or subject to the procedure requirements of IRC Sec. 170(a).
If employers do not comply with the Notice, the doctrines of constructive receipt and assignment of income would apply, taxing the employees on the compensation donated, with income, Social Security, and Medicare tax assessed. Though the employees would get a charitable deduction on the donated wages, that would not offset the FICA taxes assessed and the value of the deduction may be lower than the increased standard deduction (for 2020, the standard deduction is $12,400 for single filers and married filers filing separately; it is $24,800 for married filers filing jointly). They would be able to deduct a portion of the wages above-the-line as enacted as part of the CARES Act.
The other alternative for employers to consider, on which the IRS has provided guidance, is a leave-sharing program for disasters and medical emergency. See Notice 2006-59 and Rev. Rul. 90-29. The IRS has provided favorable tax treatment for these plans which permit employees to deposit leave in an employer-sponsored leave bank for use by other employees who have been harmed by a major disaster. The IRS will not assert that the donor who deposits the accrued wages in an employer sponsored leave bank under a major disaster leave-sharing plan will realize income or have wages. A leave donor may not claim an expense, charitable contribution, or loss deduction on account of the deposit of the leave or its use by a leave recipient.
To establish a major disaster leave-sharing plan, the plan must be in writing and allow an employee 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, meaning that the disaster has caused severe hardship to the employee or family member of the employee that requires the employee to be absent from work. Other requirements include the following:
- The plan does not allow a leave donor to deposit leave for transfer to a specific leave recipient.
- The amount of leave that may be donated by a leave donor in any year generally does not exceed the maximum amount of leave that an employee normally accrues during the year.
- A leave recipient may receive paid leave (at his or her normal rate of compensation) from leave deposited in the leave bank. Each leave recipient must use this leave for purposes related to the major disaster.
- The plan adopts a reasonable limit, based on the severity of the disaster, on the period of time after the major disaster occurs during which a leave donor may deposit the leave in the leave bank, and a leave recipient must use the leave received from the leave bank.
- A leave recipient may not convert leave received under the plan into cash in lieu of using the leave. However, a leave recipient may use leave received under the plan to eliminate a negative leave balance that arose from leave that was advanced to the leave recipient because of the effects of the major disaster. A leave recipient also may substitute leave received under the plan for leave without pay used because of the major disaster.
- 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.
- Leave deposited on account of one major disaster may be used only for employees affected by that major disaster.
Rev. Rul. 90-29 addressed leave-sharing plans for medical emergencies that permit employees to donate leave to a leave bank for use by other employees affected by a medical emergency. The plans must provide that any employee with a medical condition (or family member with a medical condition) that requires a prolonged absence of the employee from work that results in a substantial income loss. The recipient employee is required to exhaust all other forms of paid leave.
In addition to the tax issues associated with the leave-sharing or donation programs, employers should also take into account state leave laws, increased costs of the programs, donation limits, discrimination claims and privacy concerns.