The ever-developing COVID-19 pandemic has disrupted workforces across the world, causing employers to consider actions they can take to mitigate the impact of this disruption on employees. One potential action is adoption of leave-sharing arrangements, pursuant to which U.S. employees with accrued leave would be able to donate leave to a leave bank maintained by the employer for use by other U.S. employees to cover an otherwise unpaid absence from work caused by COVID-19.
Under leave-sharing arrangements that meet guidance issued by the Internal Revenue Service (IRS), a leave donor is not subject to federal income or employment taxes on his or her donation to the leave bank, and the leave recipient is subject to federal income and employment taxes on the pay he or she receives upon use of the donated leave.
This Sidley Update focuses on two categories of leave-sharing arrangements that employers may consider adopting in connection with the COVID-19 pandemic: major disaster leave-sharing plans and medical emergency leave-sharing plans.
Background — Major Disaster and Medical Emergency Leave-Sharing Plans
Major Disaster Leave-Sharing Plan
In Notice 2006-59, the IRS provided guidance on leave-sharing plans that permit employees to donate leave to a leave bank for use by other employees adversely affected by a “major disaster.” To qualify for the favorable tax treatment discussed above, the major disaster leave-sharing plan (which must be in writing) must have features consistent with the following (in each case, assuming COVID-19 is the relevant major disaster):
- Eligible Leave Recipient: Any employee for whom COVID-19 has caused severe hardship to such employee (or his or her family) that requires such employee to be absent from work.
- Limit on Donated Leave: This is generally limited to the donor’s normal annual leave accrual in any given year and may not be directed to a particular recipient by the donor.
- Recipient Use of Leave: Under the plan, the employer is required to make a reasonable determination (based on need) as to the amount of leave a recipient may utilize from the leave bank.
- Timing of Program: The plan must include a reasonable limit on the timing of donations and use of leave by recipients (e.g., during the COVID-19 pandemic).
- Return of Unused Donated Leave: Except in the case of certain de minimis amounts, any leave in the bank remaining after the end of the COVID-19 pandemic and termination of the program must be returned, proportionally, to donors.
- Restrictions on Use: Donated leave (A) must be used for purposes related to the COVID-19 emergency and (B) may not be converted into cash in lieu of using the leave (but it may be used to eliminate a negative leave balance arising from the COVID-19 emergency).
Notice 2006-59 is restricted in its applicability to employees adversely affected by a “major disaster,” which is defined, in relevant part, as a situation declared a major disaster by the President of the United States under Section 401 of the Robert T. Stafford Disaster Relief and Emergency Assistance Act (which generally requires the Governor of each state to separately request the President to make such a declaration). The President has indicated that he believes the COVID-19 pandemic is of sufficient severity and magnitude that a declaration of a major disaster may be appropriate and encouraged requests by all Governors. Governors of New York, California and Washington state have made such requests, and the President has declared COVID-19 a major disaster in each such state. We anticipate that other requests by Governors and major disaster declarations will follow.
Medical Emergency Leave-Sharing Plan
The IRS provided guidance in Revenue Ruling 90-29 on leave-sharing plans that permit employees to donate leave to a leave bank for use by other employees affected by a medical emergency. To qualify for the favorable tax treatment discussed above, the medical emergency leave-sharing plan must have features consistent with the following:
- Eligible Leave Recipients: Any employee with a medical condition (or a family member with a medical condition) that requires a prolonged absence of the employee from work and results in a substantial loss of income.
- Recipient Must Exhaust Other Paid Leave: The recipient employee is required to exhaust all other forms of paid leave (e.g., paid time off, sick leave) before using the leave bank.
Unlike a major disaster leave-sharing plan, there is no limit on the amount of leave that an employee may donate, the plan may be ongoing (as opposed to limited in duration) and the employer is not required to return unused leave and may retain the donated leave in a bank for future use.
Considerations for Employers Considering Arrangement on Account of COVID-19
Although employers may adopt and maintain both types of arrangements in connection with the COVID-19 pandemic, the arrangement most attractive to a particular employer will depend on the applicable workforce and certain other considerations such as the following.
Major Disaster Leave-Sharing Plan
- Broad Availability Across Workforce: Unlike a medical emergency leave-sharing plan, employees who are unable to work for a period of time on account of COVID-19, but who are not personally suffering from a COVID-19 medical emergency (e.g., employees at a location that has been temporarily closed; asymptomatic employees who had COVID-19 exposure and who are quarantined, etc.), are potential recipients of donated leave.
- Complete Overlap of Medical Emergency Leave-Sharing Plan: To the extent an employer adopts this type of plan, employees suffering from a COVID-19 medical emergency would be eligible recipients, and unless the employer desired to take advantage of certain flexibility of a medical emergency leave-sharing plan (see below), there would be no need to maintain a separate medical emergency leave-sharing plan.
Medical Emergency Leave-Sharing Plan
- Focused Availability: To some employers, a more narrow scope of availability to those individuals who have suffered a COVID-19 medical emergency may be desirable (especially if the employer anticipates insufficient leave donations to assist all employees adversely affected by COVID-19).
- Ability of Donor to Select Recipient: Although this feature may or may not be desirable (as it would create additional administrative challenges), the plan may be designed to permit leave donors to select a recipient, which is not a permitted feature of a major disaster leave-sharing plan.
- No Limit on Donated Leave: Unlike a major disaster leave-sharing plan, the plan may be designed to permit the donation of an unlimited amount of accrued leave by donors.
Notwithstanding which arrangement an employer may choose to adopt, employers should consider other aspects of these programs, including (i) administrative complexity, (ii) potential cash flow issues (e.g., potential immediate increase in use of leave, including leave that may otherwise have been forfeited under use-it-or-lose-it leave policies), (iii) advisability of donors retaining some level of leave for personal use, (iv) potential disappointment by employees who are unable to benefit from the program (e.g., for example, where demand far exceeds donations), (v) privacy considerations and (vi) any state law implications on the ability of an employee to donate particular types of leave (e.g., sick leave).
Sidley Austin is available to assist with an employer’s implementation of a leave program, including the preparation of the plan document, the form pursuant to which an employee may elect to donate leave, the application by an employee to receive donated leave and related employee communications.
Sidley Austin LLP provides this information as a service to clients and other friends for educational purposes only. It should not be construed or relied on as legal advice or to create a lawyer-client relationship. Readers should not act upon this information without seeking advice from professional advisers. In addition, this information was not intended or written to be used, and cannot be used, by any person for the purpose of avoiding any U.S. federal, state or local tax penalties that may be imposed on such person.
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