IRS Guidance on Employer-Based Leave Donation Programs for COVID-19 Relief Organizations
In recent years, it has become the norm for the IRS to respond to a federally declared disaster by issuing guidance enabling employers to establish “Leave Donation Programs,” which allow employees to “convert” accrued vacation, sick, or personal leave benefits into an employer-paid monetary donation to a charitable relief organization, without the employee being taxed on the value of donated leave.1Therefore, it is not surprising, but certainly welcome, that the IRS recently issued Notice 2020-46 (the Notice) to allow employers to adopt the same type of employer-based Leave Donation Programs in response to the COVID-19 pandemic.
The Notice follows the same framework as previous Leave Donation Program guidance:
COVID-19 Leave Donation Program Structure
An employee with accrued paid leave time may elect to forego the use of some portion or all of the employee’s accrued paid leave time, in exchange for the employer making a cash donation (equal to the gross value of the accumulated paid leave time) to a charitable organization that meets the definition in Internal Revenue Code (Code) Section 170(c). The charitable organization must be one that provides relief for the victims of the COVID-19 pandemic in a geographic area for which the President has issued a major disaster declaration under the Robert T. Stafford Disaster Relief and Emergency Assistance Act.2 The donation must be paid by the employer to the charitable organization before January 1, 2021.
Tax Implications for the Employee
Cash payments made to charitable organizations on behalf of employees who forego paid leave benefits under a COVID-19 Leave Donation Program are not considered wages, and the value of the foregone benefit is not included in an employee’s gross income as reported on the employee’s Form W-2.3 However, employees may not claim a charitable contribution deduction under Code Section 170 on their personal tax filings with respect to amounts donated through a COVID-19 Leave Donation Program.
Tax Implications for the Employer
The employer may deduct the cash charitable contributions made through a COVID-19 Leave Donation Program under Code Section 170 or 162, if the employer otherwise meets the requirements of the applicable Code Section.
An employer evaluating whether to adopt a COVID-19 Leave Donation Program should consider a few other items:
If the employer’s leave policy has a “use it or lose it” provision, there may be an increased cost to the employer if employees who would otherwise lose accrued leave due to non-use instead elect to convert the unused leave time into an employer charitable donation under the program.
There may be additional state leave laws that influence when and how leave may be donated in states where the employer conducts business.
Although there are no specific documentation requirements to implement a COVID-19 Leave Donation Program, an employer implementing such a program may want to develop employee communication materials and donation election forms to use for the program.
1 For example, the IRS most recently issued such guidance in response to Hurricane Michael in 2018 and the California wildfires and Hurricanes Harvey, Irma and Maria in 2017.
2 Affected geographic areas include each of the 50 states, the District of Columbia, and five U.S. territories. See https://www.fema.gov/coronavirus/disaster-declarations.
3 Note that absent IRS exceptions such as the one outlined in the Notice, a program that allows employees to donate the value of accrued leave to charitable organizations results in taxable income to employees who choose to donate leave, even though the employee loses the ability to use the donated leave.