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Volume XI, Number 129

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May 07, 2021

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IRS Issues FAQs on Leave-Sharing Plans to Aid Employees Affected by COVID-19

On August 3, 2020, the U.S. Internal Revenue Service (IRS) posted a set of frequently asked questions (FAQs) regarding the tax treatment of leave-sharing plans maintained by an employer to help its COVID-19 affected employees. The FAQs confirm that COVID-19 is a “major disaster” for purposes of IRS Notice 2006-59, which provides guidance on leave-sharing plans.

An employer may set up a tax-favored leave-sharing plan pursuant to IRS Notice 2006-59 that allows employees to deposit their accrued leave in an employer-sponsored leave bank for use by other employees who have been affected by COVID-19 pandemic. In this type of arrangement, the recipient employee, rather than the donor employee, has taxable wages and thus the recipient employee is subject to employment tax withholding requirements with respect to the donated leave. Accordingly, the value of the leave amount is reportable on Form W-2 of the recipient employee in Box 1 (wages subject to income tax), Box 3 (wages subject to Social Security), and Box 5 (wages subject to Medicare). In addition, the donor employee “may not claim an expense, charitable contribution, or loss deduction with respect to the deposited leave.”

IRS Notice 2006-59

A major disaster leave-sharing program must satisfy all requirements set forth in IRS Notice 2006-59. Such arrangements must be in a written plan document, subject to the following requirements:

  • The recipient employee must be adversely affected by a major disaster (here, COVID-19) such that “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.”

  • The plan must not “allow a donor employee to deposit leave for transfer to a specific leave recipient.”

  • The leave donated in any year must not “exceed the maximum amount of leave that an employee normally accrues during the year.”

  • The recipient employee will have taxable paid leave at his or her normal rate of compensation.

  • “The plan adopts a reasonable limit, based on the severity of the disaster, on the period of time after the major disaster occurs during which a leave donor may deposit the leave in the leave bank, and a leave recipient must use the leave received from the leave bank.”

  • The recipient employee “may not convert leave received under the plan into cash in lieu of using the leave.”

  • “The employer must make a reasonable determination, based on need,” before approving any paid leave to a recipient employee.

  • Leave deposited for a major disaster “may be used only for employees affected by that major disaster.”

  • “[A]ny leave deposited under a major disaster leave-sharing plan that is not used by leave recipients … must be returned within a reasonable period of time to the leave donors.”

On June 11, 2020, the IRS released Notice 2020-46 to address the taxability of employer leave-based donation programs that aid victims of the COVID-19 pandemic.

Employer Considerations

  • Employers may want to establish tax-favored leave-sharing plans to aid employees affected by the COVID-19 pandemic.

  • Employers with existing leave-sharing plans may want to expand or amend their plans to include COVID-19 as a major disaster.

  • Employers may want to review state-specific withholding tax requirements to ensure that leave-sharing plans conform to both IRS guidance and state-specific requirements.

  • Employers may also want to consider other altruistic options to aid employees during a disaster.

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© 2021, Ogletree, Deakins, Nash, Smoak & Stewart, P.C., All Rights Reserved.National Law Review, Volume X, Number 231
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About this Author

Eric Penkert, Ogletree Deakins Law Firm, Greenville, Labor and Employment Attorney
Associate

Mr. Penkert graduated from the University of Florida in 2007. He received his J.D. from Vanderbilt University Law School in 2010. In 2011, Mr. Penkert graduated from the University of Florida Levin College of Law with an LL.M. in Taxation. Mr. Penkert practices in the areas of employee benefits law, ERISA, and taxation. Mr. Penkert’s practice includes representation in the areas of qualified plans, fringe benefits, and compliance with other federal laws relating to employee benefits matters. Mr. Penkert assists clients in designing and drafting plans, advises clients...

864-271-1300
Shivam Bimal Employee Benefits Lawyer Ogletree
Associate

Shiv assists clients with employee benefits and executive compensation matters.  He advises clients on a variety of issues related to qualified and nonqualified plans, including plan design, implementation and ongoing administration, correction procedures, Code Section 409A issues, and IRS filing requirements.

Shiv frequently advises clients on taxability of various fringe benefits, employment tax withholding and reporting obligations, worker misclassification issues, and issues related to business travelers.  He also has experience with employment tax and executive compensation...

212-492-2500
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