As employers cope with the COVID-19 pandemic, they may consider leave-sharing programs as a method to permit employees to donate paid leave to their coworkers. Leave-sharing programs that are properly structured under Internal Revenue Service (“IRS”) guidance permit exclusion of transferred leave from the gross income of a donor employee and inclusion of the transferred leave in the gross income of the coworker recipient. However, the IRS has generally limited this favorable tax treatment to leave-sharing programs for: (1) major disasters, and (2) medical emergencies.
- Major Disaster Leave-Sharing Programs
- Eligible Employers
IRS Notice 2006-59 defines a “major disaster” as a major disaster as declared by the President under Section 401 of the Robert T. Stafford Disaster Relief and Emergency Assistance Act (“Stafford Act”). As of the drafting of this newsletter, President Trump has declared major disasters due to COVID-19 for all 50 states and the District of Columbia. Employers should consider reviewing the major disaster declaration associated with their state for any state-specific provisions.
- Major Disaster Leave-Sharing Program Requirements
To qualify for favorable tax treatment where donated leave is included in the income of the recipient and excluded from the income of the donor, major disaster leave-sharing programs for COVID-19 must meet all of the following requirements:
- The program must be in writing.
- The program must allow donors to donate accrued leave to an employer-sponsored leave bank for use by other employees who have been adversely affected by COVID-19. An employee is only adversely affected if COVID-19 has caused severe hardship to the employee or a family member that requires the employee to be absent from work.
- The program cannot allow leave donors to donate leave to a specific recipient.
- The amount of donated leave generally may not exceed the maximum amount of leave that a donor normally accrues during the year.
- A recipient may receive donated leave from the leave bank only at his or her normal rate of compensation and the donated leave can only be used for purposes related to the COVID-19 pandemic.
- The program must adopt a reasonable limit, based on the severity of the COVID-19 pandemic, on the period of time during which donors can donate and recipients can use the leave.
- Recipients cannot convert leave received under the program into cash in lieu of using the leave. However, a recipient may use leave received under the program to eliminate a negative leave balance that arose from leave that was advanced to the recipient because of the effects of the COVID-19 pandemic.
- The employer must make a reasonable determination, based on need, as to how much leave each approved recipient may receive under the leave-sharing program.
- Leave deposited on account of one major disaster can only be used for employees affected by that major disaster. Generally, any leave deposited in the leave bank that is unused by recipients by the end of the period specified in requirement 6 above must be returned within a reasonable period of time to the donors. The employer has discretion to limit such returns to donors who are still employed by the employer. The amount of leave returned to each donor must be in the same proportion as the amount of leave donated by the donor bears to the total amount of leave donated on account of the COVID-19 pandemic.
Notice 2006-59 additionally requires that: (1) donors and recipients be current employees of the sponsoring employer, (2) donors submit voluntary written requests to donate, (3) recipients apply to receive donated leave, and (4) the sponsoring employer approve both written requests to donate and applications to receive donated leave.
- Medical Emergency Leave-Sharing Programs
- Eligible Employers
Unlike major disaster leave-sharing programs, which are limited to employers in major disaster areas as declared by the President under the Stafford Act, any employer can offer medical emergency leave-sharing programs. Provided that “medical emergencies” as defined under the program covers individuals affected by COVID-19, an employer can use its medical emergency leave-sharing program for the COVID-19 pandemic.
- Medical Emergency Leave-Sharing Program Requirements
The only formal guidance available to employers seeking to utilize medical emergency leave-sharing programs is Revenue Ruling 90-29 (“Rev. Rul. 90-29”). Because there is no statutory or regulatory guidance surrounding these programs, departure from the medical emergency leave-sharing program design approved by the IRS in Rev. Rul. 90-29 increases chances of noncompliance and loss of the favorable tax treatment where donated leave is included in the recipient’s income and excluded from the donor’s income. At a minimum, employers should consider the following design elements when structuring a medical emergency leave-sharing program.
- Restrict the program to “medical emergencies.” Rev. Rul. 90-29 defines a “medical emergency” as a medical condition of the employee or a family member that will require the prolonged absence of the employee from duty and will result in a substantial loss of income. Other reasons for leave, such as military leave or leave for major disasters, should be addressed in separate leave-sharing policies. Employers should be cautious with use of medical emergency leave-sharing programs during the COVID-19 pandemic. Specifically, employers should be careful not to be over-inclusive of what is considered a medical emergency for purposes of the program. For example, hospitalization of an employee who is diagnosed with COVID-19 likely constitutes a medical emergency. However, it is probably not a medical emergency if an employee is subject to a stay-at-home order or self-quarantines after experiencing COVID-19 symptoms.
- Require employees to exhaust all paid leave. The program in Rev. Rul. 90-29 required recipients to first exhaust all other forms of paid leave, such as personal leave, vacation, sick leave, etc. When designing medical emergency leave-sharing programs, employers should keep in mind that some states may have varying rules regarding employee rights to certain leave, and employers should take steps to ensure compliance with any such rules.
- Pay donated leave at the recipient’s normal rate of compensation. Recipient employees under a leave-sharing program should not receive leave in excess of their normal rate of compensation. Otherwise, the leave-sharing program could not only lose the desired tax treatment under Rev. Rul. 90-29, but it could also be considered a plan subject to the Employee Retirement Income Security Act of 1974 (“ERISA”) rather than an exempt payroll practice.
- Implement an administrative approval process. Employers should consider implementing an approval mechanism for each transfer of donated leave, such as appointing an individual or committee to oversee the leave-sharing program for uniform administration. As part of the approval process, employers may want to use written donor and recipient applications.
It is a best practice to adopt a written leave-sharing program to document conformity with applicable IRS leave-sharing guidance. Having a written leave-sharing program will also assist with uniform administration and help demonstrate compliance with applicable state and federal laws (e.g., nondiscrimination and privacy laws).
See our September 27, 2019 blog, “Design Considerations for Medical Emergency Leave-Sharing Programs” for more information on structuring medical emergency leave-sharing programs.
- Additional Considerations for Leave-Sharing Programs Used for the COVID-19 Pandemic
- Leave Donation Limit Considerations
To the extent that employers intend to implement or use leave-sharing programs to assist with workforce management during the COVID-19 pandemic, they may want to consider the nature of the COVID-19 pandemic when setting donation limits. Employees who are overly generous and donate leave to their coworkers could later become sick and be left with insufficient paid leave to take care of themselves or their families. The highly contagious nature of COVID-19 exacerbates this issue, because chances are higher that substantial portions of an employer’s workforce will be affected by COVID-19, not just a few employees.
- CARES Act and FFCRA Considerations The Coronavirus Aid, Recovery and Economic Security Act (“CARES Act”) and the Families First Coronavirus Response Act (“FFCRA”) provide a broad spectrum of benefits and incentives to employers and employees in the wake of the COVID-19 pandemic. Employers seeking to take advantage of CARES Act or FFCRA benefits should be mindful of any restrictions related to paid leave that could affect, or be affected by, leave-sharing programs.
Although leave-sharing programs seem simple, they are surprisingly complex, and improper administration and documentation can result in unintended tax and other consequences. Employers may want to consider consulting with counsel when setting up any leave-sharing program.