What Employers Should Know About Creating Leave-Sharing Programs and Qualified Disaster Relief for Employees Affected by COVID-19

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As more employees face financial hardship due to COVID-19, many employers are exploring additional options available for providing paid leave and other financial relief. This advisory provides a high-level summary of the rules applicable to leave-sharing or paid time off (PTO) donation programs and Internal Revenue Code section 139 qualified disaster relief payments. Although the Internal Revenue Service (IRS) has not yet issued updated guidance, employers can rely on existing rulings to offer leave-sharing benefits and disaster relief payments to employees affected by COVID-19.

Employers are strongly advised to consult with counsel before implementing or making any changes to their benefits.

What Is a Leave-Sharing Program?

A leave-sharing or PTO donation program allows employees to share their accrued PTO or other leave with fellow employees who have exhausted their leave in times of illness, emergency, or other hardship. Although employers should be aware of general considerations, such as state wage and nondiscrimination requirements, there are no specific rules governing these arrangements.

Employees may designate a specific individual to whom to donate their leave or may donate to a “pool” or “bank” from which the employer will pay the recipient for his/her leave period. However, certain requirements must be met in order for the donated leave to be treated as taxable income to the recipient, and not the donor.

Who Is Taxed on the PTO Donation?

Either the donor or the recipient employee will be taxed on the donated leave. Under the assignment of income doctrine, the donor employee is taxed on the donated leave even though he or she does not receive payment, unless the donation program satisfies one of two available exceptions.

In other words, as a general rule, the donation is treated as if the donor made a gift out of after-tax income. However, the IRS has established two exceptions to this general tax rule to encourage leave donations.

What Are the Exceptions That Allow the Donated Leave to Be Taxable to the Recipient, and Not the Donor?

The recipient will be taxed on the donated leave amount if the PTO donation is made under an arrangement that satisfies one of the following exceptions:

  • (1) A “bona fide” medical emergency leave sharing program (IRS Revenue Ruling 90-29) that assists only employees who suffer a “medical emergency” and satisfies the following requirements:
    • The program is documented in a written plan or policy;
    • Recipients are limited to employees who are eligible to accrue the PTO or other donated leave;
    • Recipients are required to first exhaust all other PTO or paid leave;
    • The applicable medical emergency must require a prolonged absence; and
    • All recipients must use the donated leave for purposes related to the medical emergency and return any excess to the leave bank.

Although the IRS has informally opined that a medical emergency leave sharing program may permit donors to designate a specific leave recipient, employers should consult with counsel if considering this program design. 

  • (2) A “disaster leave” sharing program (IRS Notice 2006-59) that assists only employees who are adversely affected by a major disaster declared by the President of the United States and satisfies the following requirements:
    • Recipients are limited to employees who are required to be absent from work due to a major disaster that has caused severe hardship to the employee or the employee's family member;
    • The program prohibits leave donors from designating a specific leave recipient;
    • The amount of leave that can be donated by a leave donor in any year may not exceed the maximum amount of leave that an employee normally accrues during the year;
    • All recipients are required to use the donated leave for purposes related to the major disaster and to return any unused amount;
    • All leave deposited on account of one major disaster must be used only for employees affected by that major disaster; and
    • Any leave deposited to the major disaster leave bank that is not used by leave recipients at the end of a reasonable period specified by the employer must be returned to the leave donors.

CAUTION: If a program permits a recipient to receive a PTO donation for any other purpose, the entire program will lose its tax treatment and require all donors to be taxed.

Will Leave Related to COVID-19 Qualify as a Bona Fide Medical Emergency?

For purposes of the medical emergency exception, a medical emergency is defined as a medical condition of the employee or his/her family member that would require the employee's prolonged absence from work and result in a substantial loss of income. An employee who has either received a positive diagnosis or who is experiencing symptoms of COVID-19 and has been told by a doctor to quarantine (or an employee who must take care of a family member in this situation) will qualify under the medical emergency exception if the diagnosis or symptoms will result in a prolonged absence and the other requirements are met.

Without further IRS guidance, it is doubtful that a person who is merely self-quarantined without symptoms or a doctor’s instruction to isolate will qualify, even if he or she has been told not to come to work.

Does Leave Related to COVID-19 Currently Qualify Under the Major Disaster Exception?

Yes, but only for recipients affected by COVID-19 (i.e., who work or reside) in a state that has received a major disaster declaration from the President of the United States. A list of these states is available here.

Can Employers Pay a Gross-Up to Cover the Additional Taxes on the Donation to the Recipient or Donor?

Yes, employers can gross-up the donated PTO amount to the recipient or pay an additional cash amount to a donor employee to cover the taxes on the donated leave. However, any gross-up is also taxable.

What Is Qualified Disaster Relief and How Are Employers Using This Relief to Benefit Employees?

Internal Revenue Code section 139 allows employers to provide tax-free “qualified disaster relief payments” to employees in limited circumstances. Specifically, an employer can pay or reimburse employees for “reasonable and necessary personal, family, living, or funeral expenses incurred as a result of a qualified disaster.” However, Section 139 is not designed to provide replacement income or unemployment, or to cover usual living expenses.

Instead, the relief is limited to unforeseen expenses incurred as a result of the declared major disaster. Examples of expenses that will likely fall under this exception due to COVID-19 include payments for child care if the employee’s normal child care or school is closed; commuting expenses if mass transit is no longer available; uninsured medical expenses; and funeral expenses.

If the payment is for a qualified purpose, employers are not required to report the payment on Form W-2 or Form 1099. It is important to note that although the payment is not subject to federal employment taxes, state income taxes may still apply.

Until the IRS issues guidance, we recommend limiting the application of section 139 to qualified disaster relief payments to employees who work or reside in a state that has received a major disaster declaration by the President of the United States. It is not clear from under current guidance if President Trump’s national emergency declaration entitles employers outside of these states to make tax-free payments.

We will continue to issue alerts on other benefits topics as more information becomes available. For questions on how to implement a leave sharing program or make section 139 qualified disaster payments, please contact your employee benefits counsel.


The facts, laws, and regulations regarding COVID-19 are developing rapidly. Since the date of publication, there may be new or additional information not referenced in this advisory. Please consult with your legal counsel for guidance.

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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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