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Considering a PTO-sharing program? What you need to know

Leave donation programs allow employees to donate their existing paid time off (PTO) to other employees in need. If these donation programs are not structured appropriately, employers can create adverse tax consequences for their employees. Structured properly, employers can establish leave donation programs that allow employees to provide tax-advantaged assistance to fellow employees impacted by the 2019 novel coronavirus (COVID-19) pandemic. The Internal Revenue Service (IRS) has previously established guidance approving PTO-sharing programs for medical emergencies and certain presidentially-declared disasters.

In the absence of IRS guidance, the donor employee would be taxed on the donated PTO, and the recipient would be taxed on the donated PTO when used. The guidance permits the donor employee to avoid taxation on the donated PTO, meaning that only the recipient employee is subject to tax on the PTO. PTO paid to the recipient employee is taxed as wage compensation and reported on the recipient’s IRS Form W-2.

Medical emergency plans

The IRS has approved this beneficial tax treatment for employer plans covering employees who suffer medical emergencies. To qualify for this treatment, the employer is required to have a written plan that meets a number of requirements, including, but not limited to:

  1. The plan must allow employees to donate accrued PTO to an employer-sponsored pool for use by other employees who have suffered a medical emergency.

  2. Under the plan, a medical emergency must be defined as a medical condition of the employee or a family member of the employee that requires a prolonged absence of the employee from duty and that will result in a substantial loss of income to the employee because the employee will have exhausted all PTO available apart from the PTO-sharing plan.

  3. The leave plan must provide for a written application and approval process.

Disaster plans

The IRS has also approved employer PTO-sharing plans covering employees who suffer as a result of certain presidentially-declared disasters. As of the date of this publication, U.S. President Donald Trump has declared the coronavirus pandemic to be a major disaster in the states of California, New York and Washington, allowing employers to implement the tax-advantageous program, outlined below, for effected employees in those states. Governors of other states have requested President Trump declare the pandemic as a major disaster in their states.  

To qualify for this treatment, the employer is required to have a written plan that meets certain requirements, including, but not limited to:

  1. The plan must allow employees to donate accrued PTO to an employer-sponsored pool for use by other employees who have been adversely affected by a major disaster as declared by the President under Section 401 of the Stafford Act.

  2. An employee is considered to be adversely affected by a major disaster if the disaster has caused severe hardship to the employee or a family member of the employee that requires the employee to be absent from work.

  3. Donor employees cannot designate who their leave is donated to and such donations may not exceed the maximum amount of PTO that an employee normally accrues during the year.

  4. PTO recipients may receive PTO at their normal rate of compensation.

  5. Donated PTO that is not used by recipients by the end of the time period specified in the plan must be returned within a reasonable period of time to the donor employees.

Copyright © 2020 Godfrey & Kahn S.C.National Law Review, Volume X, Number 83

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About this Author

Timothy C. Smith Tax and Employee Benefits Attorney Godfrey Kahn law firm
Associate

Tim Smith is a tax attorney in Godfrey & Kahn’s Milwaukee office. His practice focuses primarily on the federal and state income tax aspects of mergers, acquisitions, and other business transactions. Tim advises clients on the tax implications of forming, owning, restructuring, and selling limited liability companies, C corporations, S corporations, partnerships, and joint ventures.  Tim frequently represents clients with structuring and planning tax-free transactions including reorganizations, spin-offs, like-kind exchanges. His other areas of tax experience include...

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