In these difficult times, some employees may want to donate some of their accrued paid-time off, vacation, or leave to help other employees take leave to recover from COVID-19 or to care for family members with COVID-19. This can be accomplished through a “Leave-Sharing Plan” set up by their employer.
Under normal tax rules, the leave donation would have to be treated as an assignment of income that is taxable to the employee donating the leave. However, the IRS allows such a donation to be made on a tax-free basis if it is done pursuant to a Leave-Sharing Plan that meets IRS requirements for a “Medical Leave-Sharing Plan” or a “Major Disaster Leave-Sharing Plan.” Note that in both types of plans, the employee who receives the donated leave will be taxed on the pay for the donated leave.
In IRS Revenue Ruling 90-29, the IRS provided that employees could donate leave to help other employees deal with a “medical emergency,” which was defined as “a medical condition of the employee or a family member of the employee that will require the prolonged absence of the employee from duty and will result in a substantial loss of income to the employee because the employee will have exhausted all paid leave available apart from the leave- sharing plan.”
In IRS Notice 2006-59, the IRS issued guidance allowing an employer to establish a written leave-sharing program meeting eight specific requirements that would allow employees to deposit leave into an employer’s leave bank to help employees deal with a “major disaster” as declared by the President under Section 401 of the Stafford Act.
Please note that in his March 13 letter, President Trump took the initial step of declaring COVID-19 to be an “emergency” under Section 501 of the Stafford Act, but has not yet declared COVID-19 to be a “major disaster” under Section 401 of the Stafford Act. As such, it is not clear that right now a Major Disaster Leave-Sharing Plan can be established for leave relating to COVID-19. However, employers can establish a “Medical Leave-Sharing Plan” to allow employees who have exhausted their own paid leave to receive donations of leave they can use to recover from COVID-19 or to care for family members with COVID-19.
Employers interested in setting up a Leave-Sharing Plan should consult with experienced counsel to ensure that their plan meets all of the IRS requirements.