IRS Waives Taxes on Donated PTO

The U.S. Internal Revenue Service (IRS) has special rules for leave-sharing during natural disasters.

The IRS considers COVID-19 as a major disaster. It posted a set of frequently asked questions (IRS Notice 2006-59) regarding the tax treatment of leave-sharing plans maintained by an employer to help its COVID-19 affected employees.

If you have a leave sharing program your employees will not have to pay taxes on any paid time off (PTO) they give to fellow employees during the COVID-19 pandemic.

Leave-sharing programs allow employees to donate their PTO (vacation or sick leave) to a general pool to be used by other employees. Employees who qualify for using donated PTO have experienced medical emergencies or were affected by major disasters causing them to exhaust all paid leave available to them.

Usually, when an employee donates leave time, the IRS treats it as W-2 compensation and employees must pay income and employment tax on the donated leave time.

The IRS allows exceptions for major disasters, however, such as a hurricane or virus. In such cases, employees who donate leave will not be taxed on the donated leave time.

For employees to take advantage of this exception, employers must sponsor and make available a “major disaster leave-sharing plan”. The main requirements of the plan:

• Donations are to be made to a “bank” for those who have been adversely affected by a major disaster and not to a specific recipient.
• Donors can't donate more time than they have accrued.
• A time limit for donating and using the time must be established.
• Recipients may not convert leave into cash.
• Recipients may use leave to eliminate a negative leave balance they accrued because of the disaster.
• The employer will determine how much leave each recipient may receive.

Employers do not have to submit reports to the IRS since this plan is not subject to ERISA regulations.

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In this issue:

IRS Relaxes FSA Guidelines During COVID

COBRA and DCAP Recipients Get Help from $1.9 Trillion American Rescue Plan Act

Does an ESOP Make Sense for Your Company?

How Carve-Outs Lower Health Plan Costs

IRS Waives Taxes on Donated PTO

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