We previously posted about two leave-sharing programs available to employers during the COVID-19 pandemic: major disaster leave-sharing programs and medical emergency leave-sharing programs. These leave-sharing programs may allow employees to donate paid leave to co-workers affected by COVID-19. When properly structured under Internal Revenue Service (“IRS”) guidance, the donated leave is excluded from the gross income of the donor employee.
On June 11, 2020, the IRS published Notice 2020-46, which permits employers to establish an additional type of leave-sharing program: a leave-based donation program under which employees can donate vacation, sick, or personal leave in exchange for cash payments that the employer makes to a charitable organization described in Internal Revenue Code (the “Code”) Section 170(c) (a “Section 170(c) Organization”).
Notice 2020-46 provides that leave donated pursuant to a leave-based donation program will not be treated as a donor employee’s wages or constructively received income as long as the subsequent employer cash payments are: (1) made to Section 170(c) Organizations for the relief of victims of the COVID-19 pandemic in the affected geographic areas; and (2) paid to Section 170(c) Organizations before January 1, 2021. Employers are permitted to deduct these cash payments as charitable contributions or as business expenses under Code Sections 170 or 162, respectively. Donor employees are not permitted to claim a charitable deduction for donated leave. Employer cash payments should not be included in Box 1, 3 (if applicable) or 5 of Form W-2.
Notice 2020-46 does not provide specific guidance for structuring leave-based donation programs, so employers have discretion regarding establishment and administration. However, employers might consider review and implementation of best practices for leave-sharing programs. For example, adoption of a written leave-based donation program can assist with administration and documentation of compliance with applicable state and federal laws (e.g., nondiscrimination and privacy laws).
To the extent that employers intend to implement or use leave-sharing programs, they may want to consider imposing donation limitations. Employees who are overly generous and donate leave could later become sick and be left without sufficient paid leave to care for themselves or their families. The highly contagious nature of COVID-19 exacerbates this issue, as significant portions of an employer’s workforce are potentially at risk of becoming sick.
Employers may want to consider consulting with counsel before setting up a leave-based donation program. Leave-based donation programs are surprisingly complex, and improper administration can result in unintended tax and other consequences.