Employers often allow employees to donate leave to co-workers who are experiencing medical emergencies. If properly structured, these leave transfers can be excluded from the gross income of the donor employee and included in the gross income of the co-worker recipient. There are no statutes or regulations governing these arrangements. The only formal guidance available to employers seeking this favorable tax treatment for medical emergency leave-sharing programs is Revenue Ruling 90-29 (“Rev. Rul. 90-29”). Other leave-sharing programs, such as those for major disasters or military leave, are subject to different rules and may or may not receive similar tax treatment.
Departure from the medical emergency leave-sharing program design approved by the IRS in Rev. Rul. 90-29 increases chances of noncompliance and loss of the favorable tax treatment for leave donors. Accordingly, employers should consider, at a minimum, the following design elements when setting up a medical emergency leave-sharing program.
- Restrict the program to “medical emergencies.” Rev. Rul. 90-29 defines a “medical emergency” as a medical condition of the employee or a family member that will require the prolonged absence of the employee from duty and will result in a substantial loss of income. Other reasons for leave, such as military leave or leave for major disasters, should be addressed in separate leave-sharing policies.
- Require employees to exhaust all paid leave. The program in Rev. Rul. 90-29 required recipients to first exhaust all other forms of paid leave, such as personal leave, vacation, sick leave, etc. When designing medical emergency leave-sharing programs, employers should keep in mind that some states may have varying rules regarding employee rights to certain leave, and employers should take steps to ensure compliance with any such rules.
- Pay donated leave at the recipient’s normal rate of compensation. Recipient employees under a leave-sharing program should not receive leave in excess of their normal rate of compensation. Otherwise, the leave-sharing program could not only lose the desired tax treatment under Rev. Rul. 90-29, but it could also be considered a plan subject to the Employee Retirement Income Security Act of 1974 (“ERISA”) rather than merely a payroll practice.
- Implement an administrative approval process. Employers should consider implementing an approval mechanism for each transfer of donated leave, such as appointing an individual or committee to oversee the leave-sharing program for uniform administration. As part of the approval process, employers may want to use written donor and recipient applications.
Two additional considerations are worth mentioning. First, it is a best practice to adopt a written policy to document conformity with Rev. Rul. 90-29. Having a written policy will also assist with uniform administration and help demonstrate compliance with applicable state and federal law (e.g., nondiscrimination and privacy laws). Second, although the Rev. Rul. 90-29 program was structured as a leave-bank, under which employees donated leave into a bank for later withdrawal for an unspecified employee, the IRS, in informal guidance, has since indicated that it is permissible to allow employees to donate to specified recipients under medical emergency leave-sharing programs.
In addition to Rev. Rul. 90-29, employers may refer to private letter rulings (“PLRs”) 9051005 and 200720017 for additional guidance on medical emergency leave sharing. However, PLRs are not binding authority and may not be relied upon when setting up leave-sharing programs.
Although these programs seem simple, they are surprisingly complex, and improper administration and documentation can result in unintended tax and other consequences. Plan sponsors should consult with counsel when setting up any leave-sharing program.