How to correctly establish a leave donation program at your company

Posted February 1, 2017

By Ed Zalewski, PHR, editor, J. J. Keller & Associates

One of your employees requests time off to care for a family member who is experiencing a medical emergency. The employee has only a few hours of vacation remaining, so most of her absence would be unpaid. You’d like to let other employees donate paid time off to her, but you aren’t sure how to go about it.

The Internal Revenue Service (IRS) does allow employees to donate leave for certain emergencies. However, leave donation programs must follow certain requirements. Otherwise, employees who donate leave would be taxed on the value of the hours donated. Under an established program, employees who donate leave won’t be taxed on the value of the donation, but they cannot count the value as a charitable contribution.

Creating a program

The IRS will not recognize a program created to benefit a specific individual. Rather, the program should be created to benefit any employee affected by particular circumstances, such as a family medical emergency or a natural disaster.

A leave donation program should be established in writing. You may allow leave donations outside of an established program, subject to the tax consequences discussed later in this article, or you may take the opportunity created by a particular employee’s unfortunate circumstances to create a qualifying program.

An established program should create a bank to contain the donated leave, and should describe how employees may donate. You may want to limit donation amounts to ensure that employees retain sufficient leave for their own needs. Donors should also understand that they cannot choose which individual will receive their donation.

The plan should also specify how the donated time will be distributed to employees who are deemed eligible. For example, a recipient may be required to exhaust all of her or her own paid time off and submit a written request for a qualifying reason such as a personal medical emergency, the medical emergency of a family member, or the death of an immediate family member (parent, child, or spouse). Remember that you must keep employee medical information confidential.

Distributing leave

Donated leave should be distributed at the recipient’s usual hourly rate, but you may account for pay differences among donors and recipients. For example, if an employee earning $18 per hour donates 10 hours of leave (or $180), then an employee earning $12 per hour could be paid for 15 hours of time off (receiving $180).

The time should be provided like any other paid time off and treated as wages. Donated hours cannot be provided in cash. You may also need to verify that the recipient is using the leave for qualifying reasons. Unfortunately, some employees may attempt to abuse the benefit by taking additional time off for other (unqualifying) reasons.

Tax consequences

If you do not have an established program but want to help an employee in need (or want to let employees donate time for non-qualifying reasons), you may do so. However, anyone who donates leave must be taxed on the equivalent income. Essentially, the IRS requires you to treat the situation as if the donor employee received a cash payout for the hours (taxable income) and then gave the money to a coworker.

Under an established program in which donations are distributed for qualifying reasons, those tax consequences don’t apply.

While the IRS does have rules for setting up leave donation programs, the agency has not published much guidance on the specifics. If you are considering establishing a program, consider contacting an attorney for assistance.

In addition to medical emergency leave, you can establish a leave donation bank for employees affected by a major disaster such as a tornado or hurricane. Such programs must address additional considerations, such as limiting the distributions to reasonable amounts and within a reasonable time after the disaster. In addition, if the program was created to assist employees affected by a specific event, any unused hours must be returned to the donors after a reasonable period.

About the author:

Ed Zalewski is a certified Professional in Human Resources and an editor at J. J. Keller & Associates, a nationally recognized compliance resource company that offers products and services to address the range of responsibilities held by human resources and corporate professionals. Zalewski specializes in employment law topics such as the Fair Labor Standards Act, employee benefits, and discrimination and harassment. He is the author of J. J. Keller’s FLSA Essentials guidance manual and BottomLine Benefits & Compensation newsletter. For more information, visit www.jjkeller.com/hr. View Ed’s LinkedIn profile.