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Leave Sharing Programs: A Critical Bridge for Employees Affected by COVID-19

The federal government may soon be providing paid leave assistance to employees affected by COVID-19. In the meantime, however, employers that maintain leave sharing programs can leverage those programs to help soften the financial impact on employees forced to miss work because of COVID-19.

Leave sharing programs allow employees to donate their accrued paid time off for use by other employees affected by a medical emergency or major disaster. Leave sharing programs are not based on any provision in the Internal Revenue Code but rather on guidance from the Internal Revenue Service, primarily Revenue Ruling 90-29. Because there are no statutory requirements regarding leave sharing programs, employers enjoy a significant amount of flexibility when designing and administering these programs.

Leave sharing programs come in two forms: (1) those that allow leave sharing for medical emergencies and (2) those that allow leave sharing for major disasters declared by the President. Both forms of leave sharing programs allow employees to donate unused leave time to their coworkers through a leave sharing bank. In addition, programs that allow for the donation of leave exclusively for medical emergencies may permit employees to donate unused leave to a specific coworker. Because, at the time of this writing, the President has not yet declared a major disaster related to the COVID-19 pandemic,[1] relief is currently available only through paid leave donation programs that offer the donation of paid leave for medical emergencies.

An employee who donates paid time off to a co-worker for use in the event of a medical emergency will not be taxed on the value of the donated leave if the program satisfies the following criteria:

  • The program must restrict how much leave a donor employee may donate, and establish rules for how donated leave will be awarded to eligible employees
  • Employees who are eligible to use donated leave must use the paid time off for leave relating to a “medical emergency,” which can be defined by the program but, at a minimum, must be a medical condition of the employee or the family member of the employee involving a prolonged period of absence from work and resulting in a substantial loss of income to the employee
  • The employee seeking to use donated leave must submit a written application requesting donated paid time off and have exhausted all other available paid time off (such as vacation, sick days, and worker’s compensation)
  • Finally, the recipient of the leave must receive donated paid time off at her normal rate of compensation. For example, if a donor employee who earns $20 an hour donates 10 hours of vacation time ($200), a recipient who earns $10 per hour must receive 20 hours of paid time off at her normal rate of pay

In addition to the above requirements mandated by the Internal Revenue Service, leave sharing donation programs may be subject to other laws. For example, a leave sharing program may constitute a “welfare benefit plan” subject to ERISA if it does not satisfy the regulatory payroll practice exception. To satisfy the payroll practice exception a leave sharing program must: (1) be unfunded (that is, benefits must be paid from the general assets of the employer), (2) provide benefits not exceeding 100% of the leave recipient’s normal compensation, (3) be available only to current employees, and (4) not claim to be an ERISA plan. Leave sharing donation programs that do not satisfy these requirements must comply with, among other things, the plan document, reporting, and disclosure requirements under ERISA. Employers should also ensure that their leave sharing donation programs do not run afoul of antidiscrimination laws such as the Americans with Disabilities Act (ADA), Age Discrimination and Employment Act (ADEA), and state and local laws that may impose additional requirements regarding the receipt and donation of paid time off or paid sick leave.

Leave sharing programs can be an effective tool in helping employers manage the effects of the COVID-19 pandemic by providing critical support to employees – particularly hourly employees – who are forced to miss work because they become ill, are quarantined, or are caring for a family member diagnosed with COVID-19. Affected employees could apply for and receive donated leave that would allow them to collect pay even though they were not actively at work. In addition, donor employees will not be taxed on the value of donated leave if the program meets the criteria described above. Utilizing an existing or newly created leave sharing program to support employees in this way could provide a financial buffer or a bridge for employees who miss work due to COVID-19 until the federal government provides additional relief.

Employers who sponsor a leave sharing program should review it to ensure that the program’s definition of “medical emergency” is broad enough to allow employees to take paid leave to deal with the effects of COVID-19. Employers who do not currently sponsor a leave sharing program may wish to consider adopting one and should seek professional guidance before doing so. Please reach out to one of the lawyers in Verrill’s employee benefits group for further advice regarding leave sharing programs.


[1] Leave sharing under major disaster leave sharing programs may become available if the President declares the COVID-19 pandemic a major disaster. In addition, the IRS has created special exceptions for leave sharing programs in the past to respond to a specific crisis. Following the Ebola outbreak in 2014, for example, special guidance provided employees a tax advantaged means of converting the donation of paid time off into cash that could be used to make charitable donations to support the fight against Ebola.

Topics: COVID-19, Fringe Benefit and Similar Programs, Plan Administration