In Notice 2021-42, the IRS recently extended earlier guidance on employer leave-sharing programs that aid those most adversely affected by the COVID-19 pandemic. If your organization is currently administering such a program, or might want to consider doing so, here is a brief review of the concept and rules.
Under a leave-sharing program, employees can elect to forgo vacation, sick, or personal leave in exchange for cash payments made by their employers to qualifying charitable organizations.
In the past, the IRS has provided guidance for such donations. Notable examples include Notice 2018-89, which provided guidance on leave-sharing programs related to Hurricane Michael, and Notice 2017-70, which offered guidance on leave-sharing programs related to California wildfires.
Because of the ongoing nature of the COVID-19 pandemic, the IRS decided to extend the guidance originally provided in Notice 2020-46 to cash payments made to qualifying charitable organizations after December 31, 2020 and before January 1, 2022.
As a result, in keeping with the Notice 2020-46 guidance, the IRS will not treat cash payments an employer makes under a leave-sharing program as wages or compensation to the donating employees if the cash payments are:
- Made to a qualifying organization for the relief of victims of the COVID-19 pandemic in the affected geographic areas (that is, all 50 states, the District of Columbia, and the five U.S. territories), and
- Paid to the qualifying organization before January 1, 2022
Employees electing to forgo leave may not claim a charitable contribution deduction for the value of their forgone leave.
An employer may deduct cash payments made pursuant to a leave-sharing program as a charitable contribution or as a business expense, provided the employer otherwise meets the requirements for taking such deductions. An employer should exclude any cash payments made pursuant to a leave-sharing program in Box 1, 3, or 5 of the Form W-2 of an employee forgoing leave.
A leave-sharing program can allow employees to make charitable donations during the pandemic in a relatively easy, efficient manner. We would be happy to answer any questions you may have about this recent guidance, as well as provide assistance in setting up a program at your organization.