An Employer's Guide to Employee Leave-Sharing Programs.

A popular, and altruistic, employee benefit some employers provide is a leave-sharing program. An employer-sponsored leave-sharing program allows an employee to donate accrued hours of paid vacation, or personal and potentially sick leave for the benefit of other employees who are in need of taking more leave than they have available.

Of course, as with any employer-provided benefit, there are specific requirements and tax consequences associated with a leave-sharing program. There has been very little guidance issued by the IRS on the design of such plans, but experience has shown there are a host of design considerations. This Insight provides a brief employer's guide to establishing and running a leave-sharing program.

Typical Leaving-Sharing Programs

In a typical leave-sharing plan, an employee who has accrued more paid leave than she expects or wishes to take may choose to donate hours of paid leave to an employer-managed "leave bank." Under certain conditions, other employees who need to take more time than they have accrued may seek employer approval to draw from the leave bank.

What leave can be donated may vary from state to state. For example, different states have different rules regarding an employee's right to different kinds of leave, whether accrued, earned or unearned, or whether vacation pay, sick pay or generic "paid time off." Thus, what may be donated to a leave-sharing plan may also vary from state to state. To the extent an employer only provides sick leave to benefit employees who are sick and does not provide for cashing out of sick leave upon termination, an employer will probably want to limit donations from available sick time to avoid claims that "unvested" sick leave is effectively vested.

Generally, the employee seeking to draw from the leave bank must provide the employer with a written application describing the need for such leave. Once the employer approves the application, the employee is eligible to receive additional leave, usually paid at his normal compensation rate, once his own accrued leave has been exhausted. In an IRS-eligible leave-sharing plan, special tax treatment applies to leave donors, recipients, and the employer.

There are two broad categories of approved leave sharing that have been approved for special tax treatment by the IRS: medical emergencies and major disasters. Each is discussed in more detail below.

Leave-Sharing Program For Medical Emergencies

An …