During a Presidentially-declared major disaster, such as the California wildfires, it is expected that employees adversely impacted by the disaster will need to take time off. While many employers are more familiar with employee leave sharing banks for medical emergencies, employers also have the option to establish employee leave sharing banks for major disasters. Such banks allow employees to donate their accrued and unused leave hours to other employees who have been impacted by a major disaster and need time off from work related to the disaster. If properly structured, the leave that one employee (the donor) donates to an employer-sponsored leave sharing bank for major disasters will be non-taxable to the donor employee, which is a positive incentive for employees who want to help others but not be taxed on their donations. The amounts paid to recipient employees are considered wages.
The key requirements for setting up a valid major disaster leave sharing plan are:
- The employer must have a written plan for its major disaster leave sharing program.
- Recipient employees must be adversely affected by a Presidentially-declared major disaster. The California fires have been declared a major disaster by President Biden. If an employee or their family member suffers a severe hardship caused by the disaster that requires the employee to be absent from work, the IRS will consider that employee as being adversely affected by a major disaster.
- Donor employees cannot designate or earmark their donated hours to a specific employee.
- Donor employees cannot donate more accrued leave hours than they would normally accrue for the year.
- The employer must make a reasonable determination, based on need, as to how much leave each recipient may receive plan.
- Recipient employees should be compensated when using the donated paid leave at their normal rate of pay and must use the leave for purposes related to the 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 donor may donate leave in the leave bank (“donation period”).
- Any donated leave that is not used by the end of the donation period must be returned within a reasonable period to donors. The amount of leave returned to each donor must be proportional to the amount of leave donated by the donor compared to the total amount of leave donated for the major disaster.
- Recipient employees cannot convert the donated leave to cash.
Please note that such plans are subject to meet and confer for represented employees.
See the IRS Publication 15-A, Employer’s Supplemental Tax Guide and Notice 2006-59, 2006-28 I.R.B. 60 for more information.
