For many, work and their co-workers can be like a family. As such, there are instances where employees may wish to “donate” earned paid time off (PTO) to other employees who may need it, typically to cover some sort of long-term medical condition or other emergency. This benefit is designed to be altruistic and allow co-workers to help another in need. Programs like this are especially popular now given the COVID-19 pandemic and the need to quarantine and isolate and to deal with potential long-term repercussions of the disease. However, there can be unseen tax consequences to these programs.
Both employees and employers may be shocked to find out that such programs, if not properly structured to meet certain exceptions, can result in compensation income under the “assignment of income doctrine,” which states that assigning the right to receive income to another (recipient) party does not relieve the original party (donor) of their tax liability on that income. So, in the case of donated leave, it would require them (the donor) to pay tax on the PTO used by the other employee.
Revenue Ruling 90-29 was implemented to allow employees to use their paid time PTO and donate to the employer into a “medical emergency fund.” A medical emergency can be defined as a medical condition of the family member or employee that would require a leave of absence and would also result in a substantial loss in the employee’s income since all the PTO would be used. This would also include death of a parent, spouse, or child. Under the sharing plan, the person receiving the excess PTO would be receiving the same amount of pay they would normally receive.
Additionally, employees can donate leave to other employees under a major disaster leave sharing plan under Notice 2006-59 for a major disaster as declared by the President of the United States. This would be a major disaster as declared under the Stafford Act or similar act. The absence of such declaration, such as during major casualty events that have not yet been declared, such as terrorist attacks or extreme weather would not fall under this exclusion.
Employers interested in a leave-sharing plan would need to draft up a written policy, that should include eligibility for donor and recipient employees (such as days worked), which criteria is eligible (medical, disaster or both), rate of pay differential treatment, length of allowable use, and procedure to request time. Both Revenue Ruling 90-29 and Notice 2006-59 required the employee to use all of their accrued time prior to using donated time. Notice 2006-59 includes also that this must not allow for donors to donate to specific employees but rather a “bank” that everyone eligible would be able to use, a reasonable time limit for donation and usage, amount of leave that can be given to any recipient, and require that recipients cannot receive cash in lieu of donated time. It is also important to note that employees who donate leave are not entitled to any sort of deduction for donation of the leave, and the recipient employee must pick this up as compensation income.
Any leave donation or leave sharing program that does not meet the above criteria will not be eligible for this exclusion and would result in compensation income to the donor. It has not been ruled if this would also result in income to the recipient, however it has been ruled that such receipt does not result in wages (as defined in the internal revenue code) to the recipient and therefore it is likely that it is not considered income to that employee.
Edward McWilliams, CPA
Ed is a Partner in the firm’s tax and business advisory practice focusing on providing services to middle market private companies across different industries as well as to early stage startups. Ed has over a decade of experience providing tax and business consulting services to these companies of different sizes and across different industries, bringing a broad and diverse knowledge base and strategic solutions to the many complex issues that businesses face.
Tom is a member of Cerini & Associate’s tax staff which provides services across a variety of industries including healthcare, construction, retail, manufacturing, service, and technology.