COVID-19 Employer Playbook

Major Disaster Leave-Sharing Plans

How Does it Work? Under a leave-sharing plan, an employee donates their accrued personal leave for use by another employee. In general, this would be considered an assignment of income that is taxable to the employee donating the leave (the leave donor). Absent any formal plan, this would essentially result in the employer facilitating an after-tax gift of leave to another employee. However, the IRS allows some exceptions to this general tax rule, such as major disaster leave-sharing plans. The IRS has indicated that as long as the leave-sharing plan is in writing and satisfies eight (8) specific criteria, the IRS won’t consider the leave donation to be taxable to the donor. Plan Criteria A formal written plan must be adopted, and there are (8) requirements that must be included in the written major disaster leave-sharing plan. They are: 1. The plan allows a leave donor to deposit accrued leave in an employer-sponsored leave bank for use by other employees who have been adversely affected by a major disaster. 2. The plan does not allow a leave donor to deposit leave for transfer to a specific leave recipient. 3. The amount of leave that may be donated in any year generally does not exceed the maximum amount of leave that an employee normally accrues during that year. 4. A leave recipient may receive paid leave (based on his or her normal rate of compensation) from leave deposited in the leave bank. 5. The plan adopts a reasonable limit on the period of time after the major disaster occurs during which a leave donor may deposit the leave in the leave bank, and a leave recipient must use the leave received from the leave bank. Reasonable is based on the severity of the disaster. 6. A recipient may not receive cash in lieu of using the paid leave received. 7. The employer must make a reasonable determination, based on need, as to how much leave each approved leave recipient may receive under the leave-sharing plan. 8. Leave deposited on account of one major disaster may be used only for employees affected by that major disaster. How is it Taxed? Employers must treat payments made to the leave recipient as wages for purposes of FICA, FUTA, and income tax withholding. Leave donors may not claim an expense, charitable deduction, or loss deduction for any donation of leave under the leave-sharing plan. Can Leave be Donated Now? A formal Major Disaster Leave-Sharing Plan must be in place prior to any leave donations to receive favorable taxation. In addition, Major Disaster Leave-Sharing plans require that their state be granted a declaration of “major disaster,” which is different than a National Emergency (such as the current national emergency declared by President Trump for COVID- 19). States must request a declaration of major disaster, which then must be granted by the President. To date, the states of California, Colorado, Connecticut, Florida, Iowa, Louisiana, New Jersey, New York, Texas, and Washington have approved major disaster declarations.

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