Guidance on Employer-Sponsored Leave Donation Programs During COVID-19

employee commuting and wearing a mask


One of the many uncertainties facing the workforce caused by COVID-19 is how to handle long-term employee absences due to the virus. With a finite number of PTO days, many employees face the stressor of not knowing if they will get a paid leave in the event they get sick or face mandatory isolation.

On the other hand, COVID-19 has also left people in financial distress. Medical expenses due to the virus, layoffs, furloughs and other impacts of the pandemic have left people in dire need of assistance -- but unsure of where to get it from.

To fill these needs, companies can participate in leave donation programs that work to aid employees as well as members of the community.

Types of employer-sponsored leave donation programs

While the goals of the two main types of leave donation programs are similar in that they assist people affected by situations like COVID-19, their avenues for helping are very different.

One type of program is where employees in an organization pool their PTO, vacation time and leaves to donate to an employee in need. This typically is seen in instances of individual illness or disaster since it’s aimed at assisting one person or a small group of people. Pooling leave time would be most useful in an organization where a single employee contracts the virus and needs to leave for a significant amount of time.

But for a large-scale emergency like a global pandemic, organizations looking to make a difference will need to engage in programs that can impact the entire community. Employer-sponsored leave donation programs can also make it possible for individuals and organizations to work together to help those in need. In that case, employees exchange their time off for a charitable donation made through the employer. This is a great option for organizations who don’t have individuals personally affected by the pandemic but still want to make a difference.

But there’s a catch

While sacrificing time off is a wonderful way to help those in need, it’s not completely free of drawbacks. Under regular time off and leave policies, employees are typically taxed when they either become eligible to be used or have the opportunity to dispose of it through cashing out or donation. That means that traditionally, employees will be taxed on the leave time even if they donate it.

However, there are exceptions to that rule and recent IRS guidance has applied those exceptions to the COVID-19 pandemic.

Recent guidance on employer-sponsored leave programs: what you need to know

On March 13, 2020, President Trump declared a major disaster in all U.S. states and territories, under the Stafford Act. In the case of declared disasters or emergencies, organizations are not subject to have their leave donations taxed.

In guidance released by the IRS on June 11, 2020, it was clarified that “cash payments employers make to charitable organizations that provide relief to victims of the COVID-19 pandemic in exchange for sick, vacation or personal leave which their employees forgo will not be treated as compensation.” In other words, employees won’t be taxed for the leave they donate as it won’t be considered claimable income.

The IRS guidance allows employers and employees to work together to assist a charity during this great time of need. It also gives employees a way to use accrued leave time before they lose it, without facing a tax penalty. Additionally, employers can deduct the donation payments as a business expense or charitable contribution. Overall, the employer-sponsored leave donation program is mutually beneficial for all involved.

Setting up your employer-sponsored donation program

If you’re looking to set up an employer-sponsored donation program, here are some basic steps to follow:

  1. Identify your benefiting charity. This is a good opportunity to involve all employees in the process. Ask team members if they have any personal ties to COVID-19 relief charities or know of any they’d like to contribute to, as that will likely increase participation rates.
  2. Set a budget. Setting a goal for how much you’d ultimately like to contribute will allow you to set guidelines on how much time each employee can donate.
  3. Define eligibility criteria. You may want to set eligibility criteria based on the amount of time off accrued, probationary periods or other company policies.
  4. Roll out the plan and keep communicating progress. Knowing they are making a difference during a time of need will be a big morale and engagement boost for employees, so be sure to provide frequent updates on how your selected charity is helping those impacted by COVID-19.