Leave sharing is an altruistic benefit offered by some companies. The employer-sponsored plan gives employees the option of donating accrued sick leave or paid vacation to a charitable pool to benefit co-workers needing extra leaves due to medical emergencies or natural calamities. As with any other benefits, leave sharing plans are also associated with specific tax consequences and other requirements.
The Internal Revenue Service (IRS) offers limited guidance on leave sharing. The IRS permits special tax treatment for two broad types of leave sharing programs: leave sharing for major disasters and leave sharing for medical emergencies. Events calling for federal government assistance due to an inability of the affected local and state governments to sufficiently respond are termed major disasters. An employee residing in an area hit by such a disaster, for instance flooding, may draw from the leave bank.
A “medical emergency” refers to the medical condition of an employee or a family member, which requires the person to take an extended leave from work resulting in considerable wage loss after exhausting all available paid leaves.
The availability of a leave bank to draw upon during emergencies can provide emotional security to employees. Leave sharing also allows employees to assist coworkers in a way that does not involve cash distribution. In companies with ‘use it or lose it’ leave policies, employees are likely to donate unused leaves that would otherwise be lost.
While leave sharing programs offer advantages, they can also give rise to a number of issues, including discrimination claims, privacy issues, cash flow implications, and increased administrative complexity. Employers who allow leave sharing should be aware that amounts paid to recipients are considered wages and included in the employee’s gross income. These amounts are subject to the following taxes: Social Security, Medicare, FUTA, and federal income tax. For more information, consult the Internal Revenue Service.