IRS Allows Tax-Advantaged Leave Donation to COVID-19 Relief Organizations
UPDATE (added July 22, 2021): The IRS has extended the deadline for employer contributions to charitable organizations for the relief of victims of COVID-19 as part of a leave donation program. In Notice 2021-42, the IRS announced that employees will receive favorable tax treatment for donated leave if the employer contribution is made before January 1, 2022. This means that a leave donation program may be extended to include donation of leave in 2021, or an employer may implement a new leave donation program for COVID-19 relief in 2021.
Under new guidance, the IRS will give favorable tax treatment to employees who donate leave to COVID-19 relief organizations. In IRS Notice 2020-46, the agency announced that employees who donate paid leave for contributions to certain organizations will not be taxed on the value of the donated leave. This is a temporary exception to the general rule that employees are taxed on the value of donated leave.
Some employers offer programs through which employees can choose to forgo some of their vacation or other paid leave and donate the time. These programs come in two varieties: (1) leave-sharing programs, which allow an employee to donate paid leave for use by other employees; and (2) leave-donation programs, which allow an employee to give up paid leave in exchange for the employer contributing the value of the leave to a charitable organization.
Under a leave-sharing program, employees with accrued paid time off may donate that leave time to a leave-sharing “bank” that can be accessed by other employees in need of additional paid leave. As a general rule, employees who donate paid time off under a leave-sharing program will be taxed on the value of the donated leave. Exceptions exist, however, for leave-sharing programs that satisfy certain criteria (for example, the program must be in writing and the leave cannot be converted to cash) and limit the use of donated leave to employees affected by a medical emergency or a federally declared disaster.
Under a leave-donation program, employees forgo accrued paid time off in exchange for their employer making a tax-deductible donation to a charitable organization. In general, the employee is taxed on the donated leave as if the employee had received the value of the donated leave as wages, and both the employer and employee may deduct the value of the donated time as a charitable donation.
However, the IRS has occasionally created temporary exceptions that permit employees to avoid taxation on leave donated through a leave-donation program, often in response to natural disasters. Through Notice 2020-46, the IRS creates such an exception for leave donation related to COVID-19. Specifically, Notice 2020-46 provides that employees who forgo paid time off in exchange for tax deductible employer contributions made before January 1, 2021, to a charitable organization for the relief of victims of COVID-19 will not be taxed on the value of the donated leave. The employer may still deduct the contribution, but the employee may not take a charitable deduction.
Employers considering adopting a leave-donation or leave-sharing program should take care that the program is not subject to ERISA and does not violate antidiscrimination laws. Although both are relatively remote risks, an employer should consult with qualified benefits counsel before implementing the program. If you have questions regarding leave-donation or leave-sharing programs please contact a member of the Employee Benefits & Executive Compensation Group at Verrill.