At Davis Brown's recent Employment Law Seminar, a hot topic was the structure and utilization of Paid Time Off and leave donation programs. Iowans tend to be generous givers. We step forward, we raise the barn, bake a pie, participate in the church rummage sale and shovel our neighbors sidewalk, so leave donation policies are a reasonable extension of our natural inclination to help out our friends and neighbors. However, the Federal Government never makes anything easy and leave donation policies, unless properly drafted, can create tax liability for the donor, the recipient and a double payroll tax for the employer who is administering the program. There are IRS issues as well as favoritism and discrimination issues that must be addressed by any employer. In a world where employees claim a co-employee didn't friend them on Facebook - who got what leave donated can be an endless topic.
The IRS places leave donation policies into two basic types, medical emergencies and major disasters. Presumably a third type would be the “are you kidding” taxable type. If you have a combined donation policy, you need to be careful that you meet all the requirements of each of the two acceptable categories in order for the policy to avoid the tax trap.
To meet IRS compliance requirements you may have a leave donation policy where leave is donated to meet the medical emergency needs of the employees who are receiving the donation. However, there are a number of requirements that are partially spelled out in the regulations, but also rely on later guidance issued by the IRS. There is not a fully comprehensive statement regarding how these policies will work, but the IRS has upheld several general policies.
In order for a policy to meet the requirements of the medical emergency IRS exemption for donations it would need to be in writing and administered by the employer. The “lets take up a collection and I will donate my PTO” informal policies would not necessarily meet the IRS requirements and do not take into account in loco parentis or extended family rulings we sometime get under the Family Medical Leave Act.
Any policy would need to specify how much leave can be donated, how much leave can be accepted and a maximum amount of leave that may be taken on a yearly basis.
There should also be a detailed procedure in place for employees to submit written requests that describe the emergency as well as requirements for supporting documentation for any such emergency or condition. Leave would be received only after the employee had received approval and permission and all other paid leave had been exhausted. The IRS being an auditing agency also requires that you have auditing measures in place to insure that the leave is used for the appropriate reasons. Leave can be targeted (I want to donate to Betty) under the medical emergency policy.
For the major disaster exception set forth under the IRS Rules, there are some similar requirements as well as some very specific issues that prohibit a donor employee from donating more in a given year than the amount the donor employee would normally accrue in any given year. This is basically the personal leave bank donation issue. You have an employee who accumulates significantly more leave than he/she is allowed to bank and therefor donates a large chunk. If that chunk of leave is more than he/she normally accumulates in the year it would not be appropriate for the leave bank. Under the major disaster exception which requires a presidential declared disaster the IRS does not allow the donor to designate the recipient of the leave.
One of the problems that we sometimes have with the ability to designate leave under the medical emergency exception is concerns of favoritism and discrimination. If you have an employee who has had a lot of absenteeism and maybe isn't well liked by fellow employees, the decision not to donate leave can create additional hard feelings and internal work place problems. Employees can feel singled out because of their religion, disability, color, gender identity and a variety of other factors when leave is not donated to them. All of this increases your potential liability risk. In administering and managing any leave policy it is not uncommon for employees who are making a harassment complaint to make statements that other people don’t like them or are picking on them. A leave donation policy where no leave was donated to the requesting employees under the individual designation policy would be fairly good evidence in any lawsuit that their claims that they were treated differently had some foundation.
Employers need to think carefully about the long-term implications of their leave donation policy, how leave will be managed and the impact this may have on their workplace. Leave donation can be an enormously positive thing and ease the burden on others but it can also have unintended tax and discrimination consequences.