Based on a small sample size (a few discussions with different clients during the past several weeks), medical leave-sharing plans seem to be a hot topic of late. This post will briefly go over the most significant applicable guidance and will discuss a few practical considerations regarding whether and how to implement this type of program.
Under a typical medical leave-sharing program, employees with accrued time off are asked to transfer some or all of their accrued time to other employees who, due to a medical emergency, have exhausted all of their accrued time and are in need of additional time off. A committee established by the employer is charged with making objective determinations of who is eligible to receive the additional time off and what amounts should be awarded.
A very basic tax principle, which goes back at least as far as the 1930 case of Lucas v. Earl, is that income should be taxable to the person who earns it, and the person cannot escape taxation by assigning it to someone else. (This is known as the “assignment of income doctrine.”) However, in Revenue Ruling 90-29, the IRS looked at a program under which employees who were undergoing a “medical emergency” could qualify as recipients of leave time surrendered to the employer by other employees or leave time deposited by its employees in an employer-sponsored leave bank. A “medical emergency” was defined under the plan as a “medical condition of the employee or a family member of the employee that will require the prolonged absence of the employee from duty and will result in a substantial loss of income to the employee because the employee will have exhausted all paid leave available apart from the leave-sharing plan.” The IRS ruled, without explanation or rationale, that the income would be taxed to the recipient of the leave, not the donor. Thus, in effect it created an exception to the assignment of income doctrine, presumably in order to achieve a result that was perceived as equitable.
It appears that, 22 years after Revenue Ruling 90-29 was issued, this exception for medical leave-sharing plans is alive and well. For example, page 13 of the 2012 version of IRS Publication 15-A states as follows:
If you establish a leave sharing plan for your employees that allows them to transfer leave to other employees for medical emergencies, the amounts paid to the recipients of the leave are considered wages. These amounts are includible in the gross income of the recipients and are social security, Medicare, and FUTA taxes, and federal income tax withholding. Do not include these amounts in the income of the transferors. These rules apply only to leave sharing plans that permit employees to transfer leave to other employees for medical emergencies.
With the exception of certain leave-sharing arrangements for Presidentially-declared major disaster areas (see Notice 2006-59), the IRS has not agreed to apply the exception to the assignment of income doctrine in areas other than medical leave-sharing. For example, in Private Letter Ruling 200720017, the taxpayer sought to create an exception for a leave-sharing program for “catastrophic casualty losses” such as terrorist attacks, natural disasters, or public health crises. The IRS indicated that, for this program, the donor of the leave would be taxed.
It is hard to discern why donors of leave should be taxed when they are seeking to help a colleague who has suffered from a terrorist attack, but not when they are seeking to benefit a colleague with a medical emergency. In any event, it is important for employers who wish to establish leave-sharing plans for medical emergencies to follow Ruling 90-29 as closely as possible in order to avoid taxing the donors of the leave, thus inflicting further punishment (beyond losing their time off) for their good deeds.
Moving beyond the tax treatment, there are some very important practical considerations for employers to ponder before implementing a medical leave-sharing plan. For example:
- Employers will need to establish and follow objective criteria and policies, preferably in writing.
- The plan likely will be fairly complex to administer.
- Employers need to consider privacy issues, as well as potential discrimination claims from employees who do not receive grants.
- Employees may feel undue pressure to donate their leave to the program.
Proponents of such plans argue that the programs help enhance morale and that employees generally appreciate the opportunity to help their less fortunate colleagues. This may well be the case. Nonetheless, employers should carefully consider all consequences, both intended and unintended, before implementing a medical leave-sharing program.