I have not been asked about this topic in my previous 25 years, yet in the past few months, I have received at least half a dozen inquiries. I am not sure of the reason this has become a hot topic lately; maybe it is COVID-19, but here are the details and considerations:
Paid time off, whether it is Vacation, Sick, PTO, or whatever a company may call it, is a great benefit to its employees. It is there in the event that the employee cannot, or maybe just does not want to go to work, yet receives their pay as normal. A company’s paid time off policy is also like a snowflake, since I cannot say that I have seen two alike policies in all of my years in this industry. How they accrue time, when they accrue, how it has to be used, how much can be accrued, and what, if any, can be carried over from one year to the next, are just a few of the many points of the snowflake that can differ. Let’s add to that another point. Donated or gifted time off.
Employee A needs or wants to take time off with pay, yet they do not have a sufficient available balance. Employee B wants to facilitate Employee A’s time off, so they will gift or donate a portion of their available balance. While that may seem harmless enough on the surface, there is much to consider, including what the IRS thinks about the idea. Based on what is discussed below, you may want to include conditions in your policy, or you may want to abandon this concept all together.
If Employee A wants to go to Maui for a two-week vacation and they are short two days, Employee B can donate the time. Sounds strange, but I am sure this has happened. Maybe they are related, right? In this situation, the IRS will have their hand out. Maybe I should say two hands. Employee A will be paid for the time off, so, of course, their income is taxable, but so will Employee B have taxable income. Employee B will need to be taxed on the fringe benefit for which they did not receive the compensation. Double taxation at its finest.
The IRS does have two conditions where they will allow this and not double tax the benefit. First, if there is a medical emergency. This is not if Employee A is out for one day because they have the sniffles. The IRS defines medical emergency as a medical condition of an employee or a family member that would lead to the worker’s absence from work for an extended length of time and cause a substantial loss of income. The details can be found in IRS Revenue Ruling 90-29. The IRS states that a bank or pool should be maintained, and donors would put time in the pool for a non-designated employee. The employee would need to exhaust all of their personal available time before they can request time from the pool. Since Revenue Ruling 90-29, the IRS has indicated that it is permissible for a direct employee to employee transfer.
The second condition would be due to a major disaster. This is defined as a declaration by the President, an event that warrants individual or public assistance from the federal government or one that has severe adverse effects on a substantial number of employees. If Employee A had a house fire that caused them to miss a significant amount of work, it would not be covered by this condition. The details of this condition are found in IRS Notice 2006-59. To utilize this condition, employees would donate time to a bank of time. Affected employees would then request to utilize time from the bank and the employer must make a reasonable determination, based on need, as to how much each person would receive. Once the disaster is over, any unclaimed time in the bank would be returned to the donor. I suppose that would happen on a pro rata basis. Unlike the medical emergency, there does not appear to be the ability for a direct transfer of time from Employee B to Employee A.
Now that the IRS is out of the way, here are the other considerations that need to be made. With a bank of time available for employees to request from, you will need a policy that prohibits discrimination and unfair treatment. Be sure this is clear and detailed. Especially in the case of the major disaster, you will likely have multiple employees vying for that time. I also look at it on the basis that if it exists, people will want it.
As a CPA, I look at it from the financial perspective. Paid time off has a value, but it is a personal value. One hour of time off for Employee A may hold a value of $10, while the value may be $25 for Employee B. If Employee B donates 40 hours to Employee A, then the company could see a gain of $600 on that transaction. If the flow of that transaction is the other way around, then the donation could cost the company $600. That could be significant to a company if you are talking about hundreds of hours being exchanged. One could make the assumption that a lower wage employee is typically the one in need, and the difference will also be in favor of the company. Another financial consideration is liability. Many companies that allow their employees to carry a balance will account for an accrued liability on their financial statements. It is calculated by looking at each employee and multiplying their hours available by the employee’s rate, but how do you account for a bank of time with no known recipient? I suppose you can take the average hourly rate across all employees and utilize that as a fair estimate, or if the bank has been around and used for some time, there may be history available.
Once you take all of the above financial and tax consequences into consideration, paid time off gifting or sharing programs could greatly benefit an employee in need. The key is having a clear policy to avoid any confusion. If you need assistance in writing a policy for this, or maybe just time off in general, let us know. We have resources available for you.
While I make every attempt to ensure the accuracy and reliability of the information provided in this article, the information is provided “as-is” without warranty of any kind. Situations and rules get defined over time and things can and do change. PayMaster, Inc and Romeo Chicco do not accept any responsibility or liability for the accuracy, content, completeness, legality, or reliability of the information contained. Consult with your CPA, Attorney, and/or HR Professional.