The devastation caused by Hurricane Harvey will continue to be felt by many Texans for the coming weeks and months. During that time, employers may wish to provide paid time off (“PTO”) benefits to employees affected by the storm who have already exhausted all available PTO, or who are otherwise ineligible for such benefits. Internal Revenue Service (“IRS”) Notice 2006-59 provides guidelines for employers to provide such assistance through the creation of “qualified employer-sponsored major disaster leave-sharing plans.” These qualified plans allow employees to donate accrued/unused PTO to a leave bank for the benefit of their fellow employees affected by a disaster. Such qualified plans may only be created in the aftermath of an event that has been declared a major disaster by the President under the Stafford Act. President Trump has made this declaration with respect to Hurricane Harvey.
Employees who elect to donate PTO would normally be required to recognize the value of the donated PTO as compensation despite the fact that they did not use the donated PTO. However, under a qualified plan meeting all IRS Notice 2006-59 requirements, the employer is not required to report the value of the donated PTO on the donating employee’s Form W-2 or withhold income tax or FICA tax relating to the donated PTO from the donating employee’s compensation. Therefore, the donating employee will not have any income tax liability with respect to the value of the donated PTO. Any donated PTO that is not used by the intended recipients must be returned to the donating employees, in an amount proportionate to their respective contributions. Further, a donating employee is not permitted to claim an expense, charitable contribution, or loss deduction on account of the donated PTO or its use by the recipient.
Only an employee who has experienced severe hardship and who must be absent from work as a result of a major disaster may be the recipient of donated PTO under such a plan. Employees who receive donated PTO must recognize it as income according to their normal rates of compensation. Consequently, recipients must report the value of received PTO on their Forms W-2, and the appropriate income taxes and FICA taxes must be withheld. The employer is allowed a tax deduction for the PTO payments made from the plan when they are disbursed to the recipient employee.
A major disaster leave-sharing plan will not qualify for this exception unless it meets a number of specific requirements, and the IRS has demonstrated in past rulings that it requires strict adherence to its guidelines. Notably, the plan must be in writing and cannot permit an employee to donate PTO to a specific employee. Rather, the employer must make a reasonable determination, based on need, as to how much PTO each approved recipient may receive under the plan. Further, the guidelines require the plan to specify a date for donations to be completed and a reasonable time limit for the use of the donated PTO.
Unquestionably, the creation of a qualified employer-sponsored major disaster leave-sharing plan is not without administrative burdens. However, such a plan could serve to benefit employees who are in real need of PTO to deal with hardships suffered as a result of Hurricane Harvey, while also eliminating the requirement that the donating employee take the donated PTO into income for federal tax purposes.
If your company is interested in creating a qualified employer-sponsored leave-sharing plan, Branscomb | PC would be happy to advise you in this endeavor. Please do not hesitate to contact Casey F. Rickard in our Tax Group directly at (361) 886-3833 or at firstname.lastname@example.org.