While the ultimate impact of COVID-19 is still unknown, many individuals are relying on the flexibility of their employers more than ever. Companies are increasingly using leave-sharing banks in addition to the paid sick leave and family leave U.S. employers must provide under the Families First Coronavirus Response Act (FFCRA).
For major disaster and medical leave-sharing programs such as we have now, the IRS has waived tax obligations for donating employees. Employees who donate to the pool will not be taxed on this donation. Employees who receive and use the donated leave will have the donated leave treated as wages, and be responsible for any corresponding taxes. Fortunately, the IRS does not require the employer to obtain pre-approval of a COVID-19 leave-sharing program nor does it require any filings or reports to be made about the program. Also, since a leave-sharing plan generally is not subject to ERISA, there are no Department of Labor filings required. In short, the only employer reporting obligation is to properly track donated leave, received leave, and report W-2 wages and withhold taxes for recipients.
Leave-sharing programs make sense for employers seeking tax-efficient opportunities to financially assist employees impacted by the pandemic. Spooling up a leave-sharing PTO bank internally can be a real challenge to manage and administer, especially with thousands of employees. This guide can help you avoid the pitfalls and get a leave-sharing program up and running quickly.
Here is a short list of key program and policy decisions related to setting up and administering a leave-sharing plan for COVID-19.
1. Which type of leave-sharing program?
Employers will need to decide which type of program to offer. Some employers may wish to offer standard, medical, or major disaster leave-sharing programs. Each company should have an understanding of what their employee’s needs are as well as assess the current economic issues at play.
2. What is the budget?
Employers will want to establish a budget for the program and consider placing limits, if any, on the amount of time that can be donated. Keep in mind that the donated time may negatively impact the recipient’s ability to obtain state disability benefits, the enhanced unemployment benefits established under state and federal laws, and/or company-sponsored short-term or long-term disability benefits.
Importantly, companies can also make one-time or on-going monetary contributions to the leave bank.
3. Who are the recipients?
Employers will want to establish the criteria for determining which employees are eligible to receive the donated time. Employers should establish fair and neutral eligibility and selection criteria for the selection of both the donors and the recipients.
If the program is viewed as favoring one group or excluding employees in protected categories, the employer may leave itself open to discrimination charges and employee relations problems. In the case of a major disaster program like COVID-19, the employer may need to establish criteria to determine which employees need the benefits more than others.
4. What is the donation procedure?
Employers need to establish detailed procedures for the donors and recipients. In the eyes of the IRS, to establish a valid policy, employers must adopt a written donation policy and establish a process for donors to use when designating how much time they wish to donate. In this regard, employers may wish to consider the following factors when drafting a policy: length of service of the donors and recipients, salaries of the recipients and donors, exempt or non-exempt status of the donors and recipients, etc.
Documenting the voluntary nature of a donation by the donor is highly recommended. Likewise, the recipient should verify that they are using the time for the intended purpose. Both of these should be documented with either electronic consent (preferred) or a signed form.
Note that employers should beware of privacy issues under the Americans with Disabilities Act, the Health Insurance Portability and Accountability Act, and the California Confidentiality of Medical Information Act. In accordance with these laws, employers are prohibited from announcing to the workforce the reason why an employee needs the donated time.
5. Who will administer the program?
Finally, employers will want to designate an employee or group of employees to administer the leave-sharing program. Namely, the employer must decide who will be the point of contact for donors and recipients. While the human resources department may seem like a natural choice, it may not have the staffing and systems to administer the program. Similarly, the payroll department may have the systems but lack the employee relations expertise to administer the program.
For these and other reasons, plan administration and adjudication can also be provided by external parties, which follow written established criteria. Oftentimes this is a practical solution that reinforces objectivity and transparency to the entire process.
Leave-sharing banks help employees navigate disruptions and strengthen culture and community, especially during natural disasters or national emergencies like COVID-19. Keeping these considerations in mind can help companies seamlessly adopt a flexible benefits approach that works best for them and their talent.
