IRS Provides for COVID-19 Leave Donation Program

September 23, 2020
Hall Benefits Law, LLC

On June 11, 2020, the IRS issued Notice 2020-46 to address potential tax issues arising from employer leave-based donation programs that help victims of the COVID-19 pandemic in “affected geographic areas” that include all 50 U.S. states, the District of Columbia, and U.S. territories. 

Leave donation programs typically allow employees with accrued vacation, sick, or leave time to donate their hours to be used by other employees who need to take more time than they have accrued. The value of unused leave donated to a leave donation program is considered wages and thus taxable as income unless specifically excluded by the IRS.

During 2020, a number of companies have implemented COVID-19-specific leave donation programs for employees affected by the coronavirus. Per Notice 2020-46, employers making cash payments in exchange for vacation, sick, or leave time that employees donate will not be treated as taxable wages if payments are made directly to charitable organizations per Code Section 170(c) prior to January 1, 2021.

In addition, the IRS prohibits employees who donate accrued vacation, sick, or leave time from claiming charitable contribution deductions. However, employers may claim either charitable contribution deductions under Section 170 or business expenses deductions under Code 162 for making cash donations to charitable organizations. Employers may not make cash donations directly to employees affected by COVID-19.

If an employer’s leave donation program extends beyond the Notice’s relief deadline of December 31, 2020, the IRS will treat employee leave donations as taxable wages, in which case employees may be able to claim a Section 170 deduction and employers will only be entitled to a Section 162 deduction for compensation. 

We help organizations set up the employee benefit plans that are right for their members, put processes in place to ensure regulatory compliance, and keep those benefit plans updated based on changes in laws and regulations. To learn more about the services we offer at Hall Benefits Law, call 678-439-6236 today.

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Hall Benefits Law, LLC

HBL offers employers comprehensive legal guidance on benefits in mergers and acquisitions, Employee Stock Ownership Plans (ESOPs), executive compensation, health and welfare benefits, healthcare reform, and retirement plans. We counsel a wide spectrum of clients including small, mid-sized, and large companies, 401(k) investment advisors, health insurance brokers, accountants, attorneys, and HR consultants, just to name a few. HBL is passionate about advising clients, and we are dedicated to our mission: to provide comprehensive, personalized, and practical ERISA and benefits legal solutions that exceed client expectations.

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