One of the few good things about a pandemic is that it can trigger the human instinct to share. If you are thinking about adopting or expanding a leave-sharing or PTO donation program, remember to consider the tax consequences to employees.

The simplest form of a leave-sharing program is where one employee donates PTO to another employee or an employer-managed PTO bank. The donated PTO can be used by another employee for any reason or for certain reasons specified by the employer.

A simple leave-sharing program like this results in the following tax consequences: The donated PTO is included in the donating employee’s wages, meaning that the amount is subject to withholding of income and employment taxes. The donating employee is not entitled to a charitable deduction. The employee who receives the donated PTO does not include any additional amount in income.

An employer can flip the tax consequences—making the donated PTO taxable to the receiving employee rather than the donating employee—by adopting a leave-sharing program that meets certain requirements. The two kinds of leave-sharing programs that seem best suited for a pandemic are the Major Disaster Leave-Sharing Program and the Medical Emergency Leave-Sharing Program.

A Major Disaster Leave-Sharing Program must meet the following requirements:

• There is a written plan.
• A donating employee is allowed to deposit PTO in a leave bank for use by other employees who have experienced severe hardship caused by a major disaster, requiring absence from work.
• A donating employee is not allowed to donate PTO to a specific recipient.
• The donated PTO does not exceed the maximum amount of PTO that the donating employee normally accrues during the year.
• The receiving employee receives the donated PTO at his or her normal rate of compensation.
• Donated PTO cannot be converted into cash.
• The employer determines, based on need, who receives donated PTO and how much.
• The plan limits, based on the severity of the disaster, when PTO can be donated and used.
• Donated PTO that is not used is returned to the donating employee on a prorated basis.

A Medical Emergency Leave-Sharing Plan must meet the following requirements:

• There is a written plan.
• A donating employee is allowed to deposit PTO in a leave bank for use by other employees who have experienced a medical emergency.
• A medical emergency is defined as a medical condition of the employee or a family member of the employee that requires prolonged absence from work and results in a substantial loss of income to the employee, because the employee will have exhausted all other PTO.
• The receiving employee submits to the employer a written application describing the medical emergency.
• The receiving employee can begin accruing additional PTO only after exhausting the donated PTO approved by the employer.
• The plan limits the amount of PTO that may be donated and the manner in which donated PTO is approved for receiving employees.

These are just some of the rules for a Major Disaster Leave-Sharing Program and Medical Emergency Leave-Sharing Program. If you decide to set one up, consult a tax professional or employee benefits counsel.

Opinions and conclusions in this post are solely those of the author unless otherwise indicated. The information contained in this blog is general in nature and is not offered and cannot be considered as legal advice for any particular situation. The author has provided the links referenced above for information purposes only and by doing so, does not adopt or incorporate the contents. Any federal tax advice provided in this communication is not intended or written by the author to be used, and cannot be used by the recipient, for the purpose of avoiding penalties which may be imposed on the recipient by the IRS. Please contact the author if you would like to receive written advice in a format which complies with IRS rules and may be relied upon to avoid penalties.

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