In Notice 2022-28[1] the IRS announced that employers can establish tax advantaged programs where employees donate some or all of their unused paid leave for certain relief for victims of the further Russian invasion of Ukraine.

This type of leave-based donation program has been authorized on a short-term, limited basis by the IRS previously in response to the 9/11 terrorist attacks, certain natural disasters and the COVID-19 pandemic.

General Rule for Such a Program for Which the IRS Has Not Provided Relief

Normally if an employer allowed an employee to “cash in” leave and direct that it be paid to a charity, this would be treated as taxable income to the employee (subjecting both the employee and employer to payroll taxes on this amount) followed by a potential deduction being allowed to the employee for the amount of the charitable contribution.

Of course, if the employee does not itemize deductions for the year in question, there would only be the income inclusion. As well, the charitable contribution does nothing to reduce the payroll taxes (FICA and Medicare) for the employee.

Terms of This Program

The Notice describes this program broadly as follows:

The Department of the Treasury and the Internal Revenue Service are aware that employers may have adopted or may be considering adopting employer leave-based donation programs to aid citizens and residents of Ukraine; individuals working, traveling, or currently present in Ukraine; or refugees from Ukraine, collectively referred to in this notice as “victims of the further Russian invasion of Ukraine.” This notice provides guidance under the Internal Revenue Code (Code) on the federal income and employment tax treatment of cash payments made by employers under leave-based donation programs to aid victims of the further Russian invasion of Ukraine. This guidance is similar to the guidance provided in Notice 2001-69, 2001-46 IRB 491, as modified and superseded by Notice 2003-1, 2003-2 IRB 257, regarding charitable relief following the September 11, 2001, terrorist attacks.[2]

The Notice defines an “employer leave-based donation program” as follows:

Under employer leave-based donation programs, employees can elect to forgo vacation, sick, or personal leave in exchange for their employers making cash payments to charitable organizations described in section 170(c) of the Code (section 170(c) organizations). Cash payments made by an employer to section 170(c) organizations under an employer leave-based donation program are referred to as “employer leave-based donation payments.”[3]

The IRS describes the treatment of these programs through the end of 2022 as follows:

Employer leave-based donation payments made by an employer before January 1, 2023, to section 170(c) organizations to aid victims of the further Russian invasion of Ukraine (qualified employer leave-based donation payments) will not be treated as gross income or wages (or compensation, as applicable) of the employees of the employer. Similarly, employees electing or with an opportunity to elect to forgo leave that funds the qualified employer leave-based donation payments will not be treated as having constructively received gross income or wages (or compensation, as applicable). Employers should not include the amount of qualified employer leave-based donation payments in Box 1, 3 (if applicable), or 5 of the electing employees’ Form W-2. Electing employees are not eligible to claim a charitable contribution deduction under section 170 for the value of the forgone leave that funds qualified employer leave-based donation payments.

An employer may deduct qualified employer leave-based donation payments under the rules of section 170 or the rules of section 162 if the employer otherwise meets the respective requirements of either section of the Code.[4]

[1] Notice 2022-28, May 19, 2022, https://www.taxnotes.com/research/federal/irs-guidance/notices/donations-under-leave-based-programs-are-not-income-to-employees/7dhqq (retrieved May 20, 2022)

[2] Notice 2022-28, May 19, 2022

[3] Notice 2022-28, May 19, 2022

[4] Notice 2022-28, May 19, 2022