Cashing Out PTO – Can You Avoid Constructive Receipt?

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Holland & Hart - The Benefits Dial

As we scramble to digest the Families First Coronavirus Response Act, the new coronavirus relief bill with paid-leave mandates, some employers are considering additional options for their workforce.  One question that has crossed our desks is whether employers can allow their employees to access and cash out accumulated sick, vacation and personal leave time (paid time off, or PTO).

Permitting your employees the discretion to cash out an accrued PTO bank as a source of funds would normally convert that PTO bank immediately to taxable income under the principles of constructive receipt.  That concept provides that an employee is constructively in receipt of income as soon as the right to receive the cash for the paid time off becomes fixed.  Because of the constructive receipt rules, an employer may only permit employees the right to convert PTO to cash for their paid time off earned in the following year.  

In response to addressing COVID-19 related financial needs, however, some employers are considering offering employees a one-time window to make an accrued PTO bank accessible for cash out.  While we await IRS guidance on this point, we are considering whether it is a reasonable approach to permit this one-time cash-out window while avoiding constructive receipt that would convert all PTO banks to cash regardless of the employee’s election.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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