In late-August, Hurricane Harvey caused widespread devastation in parts of eastern Texas due to record breaking amounts of rain and flooding. As a result, a large portion of southeast Texas has been declared a federal disaster area including Aransas, Bee, Brazoria, Calhoun, Chambers, Fort Bend, Galveston, Goliad, Harris, Jackson, Kleberg, Liberty, Matagorda, Nueces, Refugio, San Patricio, Victoria, and Wharton counties.
Postlethwaite & Netterville knows all too well the impacts of natural disasters as South Louisiana experienced record-breaking rain fall leading to severe flooding in August 2016. In order to ease the strain this event has caused employees, employers and employees may wish to engage in employee leave sharing activities where employees can "donate" paid time off, vacation or sick leave to fellow employees. Below, we have provided some general information regarding the tax treatment of these activities.
Leave Sharing Plans
- What tax rules apply to employee leave sharing programs?
- Are there special taxation rules that apply to leave sharing programs in the wake of a federally declared disaster?
Unless a leave sharing plan meets certain administrative requirements, employees who donate leave to a leave bank will generally be required to recognize the value of the donated leave pursuant to the assignment of income doctrine.
If, however, an employer maintains a “major disaster leave-sharing plan,” the donating employee will not be required to recognize income on the amount of leave donated. Instead, the employee recipient of the leave will be required to include the value of leave in gross income. In order to qualified as a major disaster leave-sharing plan, the plan must be written and meet the following requirements:
- 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.
- The plan does not allow a leave donor to deposit leave for transfer to a specific leave recipient.
- The amount of leave that may be donated by a leave donor in any year generally does not exceed the maximum amount of leave that an employee normally accrues during the year.
- A leave recipient may receive paid leave (at his or her normal rate of compensation) from leave deposited in the leave bank. Each leave recipient must use this leave for purposes related to the major disaster.
- The plan adopts a reasonable limit, based on the severity of the disaster, 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.
- A leave recipient may not convert leave received under the plan into cash in lieu of using the leave. However, a leave recipient may use leave received under the plan to eliminate a negative leave balance that arose from leave that was advanced to the leave recipient because of the effects of the major disaster. A leave recipient also may substitute leave received under the plan for leave without pay used because of the major disaster.
- 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.
- Leave deposited on account of one major disaster may be used only for employees affected by that major disaster. Except for an amount so small as to make accounting for it unreasonable or administratively impracticable, any leave deposited under a major disaster leave-sharing plan that is not used by leave recipients by the end of the period specified in the plan , above, must be returned within a reasonable period of time to the leave donors (or, at the employer's option, to those leave donors who are still employed by the employer) so that the donor will be able to use the leave. The amount of leave returned to each leave donor must be in the same proportion as the amount of leave donated by the leave donor bears to the total amount of leave donated on account of that major disaster.
If the plan meets the above requirements, then the amounts donated will not be income to the donor employee, but will instead be included as income with respect to the recipient employee.
Questions & Resources
For more disaster recovery resources such as a response guide, casualty losses, employer sponsorsed disaster relief benefits and restoring technology, click here.
If you have any questions regarding employee leave sharing programs, please contact your P&N representative or one of our tax professionals below.
View More Disaster Recovery Resources
This information is provided for general educational and information purposes only. This does not constitute legal advice, tax advice, accounting services, investment advice or professional consulting. Information contained in this article is general in nature and is not intended to be relied upon as complete information. Specific advice as to your situation should be sought before taking action on information discussed in this publication. While every attempt is made to ensure the accuracy of the information provided, we not certify the accuracy of the information.