As discussed in our August 10, 2012 post on medical leave-sharing plans, employees are generally taxed on income that they earn and then assign to somebody else. In IRS Notice 2006-59, the IRS created an exception in the case of certain leave-sharing plans under which employees transfer earned leave to an employer-sponsored leave bank for use by other employees who have been adversely affected by a major disaster. (This exception was created in the wake of Hurricane Katrina.) In IR-2012-84, the IRS indicated that this treatment applies in the case of Hurricane Sandy. Thus, for leave-sharing plans that meet the specific requirements of Notice 2006-59, the recipient of the leave, not the donor, is taxed on the forgone leave.
The following are some of the requirements of Notice 2006-59:
- For an employee to qualify as a leave recipient, the disaster must have caused severe hardship to the employee or a family member that requires him or her to be absent from work.
- The donor cannot choose the specific recipient of the leave forgone by the donor.
- The employer must impose reasonable limits on both (1) the period of time after the disaster during which the leave may be deposited and used and (2) based on the recipient’s individual circumstances, the amount of leave that he or she may receive.
- The leave recipient may not convert the received leave into cash.
- Unused leave must be returned to a donor in the same proportion that the amount of leave donated by that donor bears to the total amount of leave donated.