The IRS has published an FAQ that provides an employer may set up a leave sharing plan related to the COVID-19 national emergency that will be treated as meeting the requirements of Notice 2006-59.[1]

The FAQ starts out by answering the following question:

Q1. May employers set up a leave-sharing plan under IRS Notice 2006-59 (PDF) that permits employees to deposit leave in an employer-sponsored leave bank for use by other employees who have been adversely affected by the COVID-19 pandemic?

A1. Yes. Notice 2006-59 provides guidance on the federal tax consequences of certain leave-sharing plans that permit employees to deposit leave in an employer-sponsored leave bank for use by other employees who have been adversely affected by a major disaster such as the COVID-19 pandemic. See Notice 2006-59 for the requirements of a qualifying leave-sharing plan.[2]

Notice 2006-59 provides that a qualified leave sharing plan related to a disaster must be a written plan that meets the following requirements:

1. 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. For purposes of the plan, an employee is considered to be adversely affected by a major disaster if the disaster has caused severe hardship to the employee or a family member of the employee that requires the employee to be absent from work.

2. The plan does not allow a leave donor to deposit leave for transfer to a specific leave recipient.

3. 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.

4. 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.

5. 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.

6. 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.

7. 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.

8. 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 paragraph 5, 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. [3]

Under the Notice, the following tax consequences will arise from such a plan:

The IRS will not assert that a leave donor who deposits leave in an employer-sponsored leave bank under a major disaster leave-sharing plan realizes income or has wages, compensation, or rail wages with respect to the deposited leave, provided that the plan treats payments made by the employer to the leave recipient as “wages” for purposes of FICA, FUTA, and income tax withholding, and as “compensation” for purposes of RRTA and “rail wages” for purposes of RURT, unless excluded therefrom under a specific provision of the Code. A leave donor may not claim an expense, charitable contribution, or loss deduction on account of the deposit of the leave or its use by a leave recipient.[4]

The IRS FAQ on COVID-19 related plans confirms the lack of negative tax consequences to the employee:

Q2. Does an employee who deposits leave have any income tax consequences?

A2. No. The employee who deposits leave need not include the deposited leave in income or wages.[5]

Similarly, the employee is not going to be allowed to claim any sort of deduction related to this donation of leave:

Q3. May an employee who deposits leave claim an expense, charitable contribution, or loss deduction in the amount of the deposited leave?

A3. No. An employee who deposits leave may not claim an expense, charitable contribution, or loss deduction with respect to the deposited leave.[6]

[1] “Leave Sharing Plans Frequently Asked Questions,” IRS website, https://www.irs.gov/newsroom/leave-sharing-plans-frequently-asked-questions, August 3, 2020

[2] “Leave Sharing Plans Frequently Asked Questions,” IRS website, https://www.irs.gov/newsroom/leave-sharing-plans-frequently-asked-questions, August 3, 2020

[3] Notice 2006-59

[4] Notice 2006-59

[5] “Leave Sharing Plans Frequently Asked Questions,” IRS website, https://www.irs.gov/newsroom/leave-sharing-plans-frequently-asked-questions, August 3, 2020

[6] “Leave Sharing Plans Frequently Asked Questions,” IRS website, https://www.irs.gov/newsroom/leave-sharing-plans-frequently-asked-questions, August 3, 2020