Last year during the height of the COVID-19 pandemic, participating U.S. employers had the option to use employees’ donated, unused paid time off (PTO) hours as cash contributions to eligible charitable organizations. The program expired at the end of 2020. On June 30, 2021, it was retroactively extended until December 31, 2021, giving employers more time to take advantage of charitable tax deductions or deductible business expenses.
Leave Sharing Programs
Employers have had the option to establish leave-sharing programs for years. Pooling unused paid time off (PTO) hours so another employee can access them during an emergency is a way to bolster morale, among other positive benefits. Traditionally, the employee who donates unused PTO is still subject to taxes on the dollar equivalent of the donated hours, while the employee who accepts the donation must also recognize the amount as taxable income. There are two exceptions where the donor is not required to pay taxes on donated PTO: medical emergencies or major disasters.
The medical emergency exception is a qualifying event when an employee or family member suffers a medical condition that requires the employee’s extended absence from work, thus causing substantial loss of income when the employee’s PTO is exhausted.
The major disaster exception comes into play when the president declares an emergency under Sec. 401 of the Stafford Act. If a nationally recognized disaster affects a fellow employee who then accepts donated PTO as a result, leave donations are non-taxable.
Implementing either of these leave-sharing programs – or simply one where employees are taxed normally – requires written changes to an employee benefit plan document. There are several steps involved and other considerations, like eligibility, state regulations, and more.
COVID-19 Leave Sharing Program
In IRS Notice 2020-46, a third and temporary exception to leave-sharing programs was expanded whereby employees can elect to forgo vacation, sick, or personal leave and the employer makes cash payments of the same amount to charitable organizations that provide relief to COVID-19 victims. In exchange, the employee is not taxed on the donated PTO and the employer can elect to take either charitable tax deductions or deductible business expenses. Employers must meet normal eligibility requirements for charitable deductions or business expense deductions.
The original ending date for these programs was December 31, 2020. On June 30, 2021, the IRS issued Notice 2021-42 extending the programs through December 31, 2021. Qualifying charitable organizations must be located in the 50 states, Washington, D.C., or American territories.
Under the COVID-19 leave sharing program, the employer receives the charitable deduction, not the employee, though the employee can help select the charitable organization. Employees are not required to report the donated PTO as wages/compensation, nor will the amount of donated PTO appear on their W-2.
To utilize the COVID-19 leave sharing program, employers must first establish a PTO bank where employees can donate unused time. There aren’t any specific IRS guidelines, so employers have flexibility in creating a plan that best meets their and their employees’ needs; however, as noted earlier, there are several considerations regarding plan design, eligibility, and implementation.
Pooling unused and donated PTO during a disaster is not new; the IRS created similar programs in response to Hurricanes Harvey and Irma in 2017 as well as the Ebola Virus in 2014. These types of programs, including for COVID-19, are different from major disaster or medical emergency exceptions in that PTO donations go to eligible charitable organizations, not fellow employees who are facing hardship. It is important to note, however, that employers have been able to use medical emergency leave sharing programs to assist their own employees in the wake of a COVID-19 diagnosis or treatment.
Establishing a leave sharing program, especially one that can benefit charitable organizations, can give employees a way to help their communities simply by donating PTO they don’t expect to use. As with other leave sharing programs, it is entirely voluntary, and employers cannot ask employees to donate their PTO. What they can do is communicate to employees and let them know that donated PTO can be used for COVID-19 victim relief.
Extending the COVID-19 leave sharing program will be welcome news for employers that already have a program in place. Employers that don’t yet have a leave sharing program established but want to give employees the option to donate unused PTO before the end of the year should act quickly. Donations to charitable organizations must be received before January 1, 2022.
Charitable organizations that provide relief to COVID-19 victims should make area employers aware of how they help, and that certain cash payments would qualify under IRS Sec. 170(c). Organizations are more likely to benefit from COVID-19 leave sharing programs when employers know what the organization is doing and how they can help.
Questions about the COVID-19 leave sharing program can be directed to PBMares’ Not-for-Profit or Employee Benefits Plan teams.