Even if you have a generous PTO policy, some employees may find themselves needing more while others find themselves with substantially more hours than they need. Enter PTO donation and leave-sharing programs, which can be great ways for employees to help their colleagues get through those occasional rough spots.
PTO donation and leave-sharing programs exist in several forms. Some employers allow workers to directly donate PTO or leave to other workers for qualifying medical or emergency reasons, others have an ongoing donation pool set up for workers to more generally and democratically donate their time off, and still others will turn donated time into time donations for victims and cash donations for relief organizations during natural disasters.
But beware: These programs can be tricky to set up.
The IRS considers these donations of time monetarily valuable. As the PTO or leave time is donated, it’s measured by its cash value, and only donations that fall under certain medical emergency, and natural disaster restrictions can be given tax-free. More and more, donations directly to individuals (and not to others) are being scrutinized for discrimination, too.
The following pitfalls should be discussed with your employment attorney and tax advisor before jumping in:
- The IRS considers employees eligible to receive time off donations as someone who has been employed for at least 90 days and is facing a medical emergency, is caring for a spouse or child in the event of a medical emergency or needs extended time off following the death of a parent, spouse or child.
- A “medical emergency” is currently defined by the IRS as a major illness or other medical condition like a heart attack or cancer that requires a prolonged absence from work, including intermittent absences that are related to the same illness or condition.
- A popular trend is for employees to donate PTO to help extend parental leave for new parents, but that’s not necessarily a federally approved usage of donated time.
- The IRS allows for tax-free leave donations to be used by those affected by a federally declared natural disaster, too. The donation must be made to an employer-sponsored leave bank (not to a specific individual) and follow these other guidelines. In certain cases, like with Hurricane Harvey, the monetary value of the donation can be made tax-free to a qualifying disaster relief organization.
- If the donation falls outside these restrictions, it could be subject to income and FICA tax withholdings (essentially, costing the employee money). See this article by the Association of International Certified Professional Accountants (AICPA) more guidance on potential taxes.
- Aside from potential taxes, these programs can add to administrative and payroll expenses, including the burden of accounting for unused donated PTO. The program may also affect short-term, and long-term disability benefits and paid family leave benefits.
- Equal treatment can be tricky with these programs. Consider this advice from HR Daily Advisor on how to plan, administrate and communicate a program that carries a low risk of discrimination.
For a closer look, take a peek at The University of Texas at Austin’s Sick Leave Pool (SLP) policy and check out these free and paid resources from SHRM. Then talk to your attorney and tax advisor about setting up PTO donation and leave-sharing programs that checks all the boxes.
