IRS Approves Leave-Sharing Plans

Bradley Arant Boult Cummings LLP eNews



The Internal Revenue Service (IRS) has released a notice on the federal tax consequences of leave-sharing plans.  The notice permits employees to deposit leave in an employer-sponsored leave bank for use by other employees who are adversely affected by a "major disaster" declared by the President.  The leave-sharing plan must meet the following requirements:

  • Donations must be used for employees affected by a "major disaster" that causes severe hardship to the employees (or their family members) and that requires the employees to be absent from work.
  • Donations may not be made for a specific leave recipient.
  • Yearly donations may not exceed the maximum amount of leave that an employee normally accrues during the year.
  • The leave recipient may receive paid leave (at his or her normal rate of compensation) from leave deposited in the leave bank for uses related to the major disaster.
  • The leave-sharing plan must have a reasonable limit, based on the severity of the major disaster, on the period of time after the major disaster occurs during which a leave donor may deposit the leave and the leave recipient must use the leave.
  • A leave recipient may not convert leave received into cash in lieu of using the leave; however, a leave recipient may use leave received under the leave-sharing plan to eliminate a negative leave balance that arose from leave that was advanced to the leave recipient because of the effects of the major disaster. A leave recipient also may substitute leave received under the plan for leave without pay used because of the major disaster.
  • The employer must make a reasonable determination, based on need, as to how much leave each approved leave recipient may receive under the leave-sharing plan.
  • Leave deposited on account of one major disaster may be used only for employees affected by that major disaster. Except for an amount so small as to make accounting for it unreasonable or administratively impracticable, any leave deposited under the leave-sharing plan that is not used by leave recipients by the end of the permitted period must be returned within a reasonable period of time to the leave donors (or, at the employer's option, to those leave donors who are still employed by the employer) so that the leave donor will be able to use the leave.

If the leave-sharing plan meets the requirements discussed above, the IRS will not assert that a leave donor who deposits leave in an employer-sponsored leave bank under a major disaster leave-sharing plan realizes income or has wages with respect to the deposited leave, provided that the leave-sharing plan treats payments made by the employer to the leave recipient as wages for the purposes of employment taxes and withholding.  It is also important to note that a leave donor may not claim an expense, charitable contribution, or loss deduction on account of the deposit of the leave or its use by a leave recipient.

The IRS has previously issued guidance permitting employers to establish leave-sharing plans for medical emergencies and leave-based donation programs to charitable organizations.  The new notice is consistent with prior guidance in providing that the amounts donated are not includible in gross income, treated as wages for employment tax purposes, or subject to income tax withholding with respect to the leave donor, provided the requirements of the notice are met.