By Mingee Kim
In response to the extreme needs for donations to support and assist victims of Hurricanes Harvey, Irma and Maria, the IRS recently released guidance that may encourage employees to help by forgoing a portion of their available paid leave balances.
The IRS guidance allows employees to donate some (or all, if they choose) of their paid leave such as sick, personal, vacation, and/or PTO (“Donated Leave”). In turn, the employer would contribute the cash value of the employee’s Donated Leave to a qualified non-profit organization. The organization to which the employer donates must be a charitable organization as described in § 170(c) of the Internal Revenue Code.
The IRS has announced that it will not treat the donated amounts of the employee’s Donated Leave as wages for tax purposes so long as the donations are: (1) made to the § 170(c) organizations for the relief of victims of Hurricane Harvey and/or Tropical Storm Irma; and (2) paid to the § 170(c) organizations before January 1, 2019. The same guidelines may also apply to any donations made for Hurricane Maria.
By following these guidelines, employees and employers will not realize any payroll tax consequences (such as SUTA or FUTA) associated with the Donated Leave. However, employees and employers may not “double dip”; employees cannot claim a charitable donation deduction (for the Donated Leave) on their individual tax filings because they have already realized the tax benefits at the time of making the donation.
Like other paid leave donation programs, the following considerations should be made:
- The cash value of Donated Leave will be calculated on the employee’s rate of pay (excluding additional compensation, e.g., overtime and/or bonus) at time of donation;
- Once the time is donated, it is considered used and will be deducted from the employee’s balance of available time;
- The remaining balance of paid leave, if any, will be subject to the employer’s normal policy provision(s).
Employers must develop well-defined policies for their Donated Leave programs. This includes providing education and establishing procedures for successful execution. Here are some examples:
- Employers may establish “floors” and “ceilings” for how much time employees may donate. This particularly affects employers that allow employees to enter into negative paid time off balances. These parameters also ensure that a reasonable amount of PTO remains available for employee use and enjoyment.
- Employers should ensure employees have accurate balances – both before and after donation.
- Employers should provide proof of donation. This might include a visual, illustrative meter tracking the amount of time (and cash equivalent) that has been donated or a “thank you for your contribution” letter back to the employee as receipt.
- Employers should determine how to update their payroll/HRIS to reflect time that has been donated. Ideally, time donated is tracked separately for audit purposes.
Expanding how accrued paid time off may be used can benefit employees and employers alike. Employees may make charitable donations to others in need, while employers may experience a reduction in outstanding paid time off liability. Contact the HUB Risk Services team to learn more about maximizing your employee productivity.