Disaster situations such as Hurricane Sandy often leave companies and employers scrambling for ways to assist those affected by the storm, including employees and employees’ families. Below are some of the ways employers are stepping up.
Leave Sharing Programs
In the aftermath storms like Hurricane Sandy, generous employees often want to share their paid leave with employees adversely affected by the storm. Employers can set up leave sharing banks to allow donated paid leave to be used by employees that need time off on account of the storm. Internal Revenue Service (IRS) Notice 2006-59 provides guidance for setting up these programs to avoid adverse tax consequences.
Key requirements for a qualifying program include:
- The leave must be used by employees who have been adversely affected by a “major disaster,” as declared by the President under Section 401 of the Stafford Act, 42 USC Sec. 5170. Hurricane Sandy has received that designation in a number of states.
- The program may not allow donors to transfer leave to specific recipients.
- Leave recipients may not convert leave received under the program into cash.
- Leave under the program must be used for the disaster.
- Leave deposited in the bank for one disaster may be used only for that disaster.
If these and other requirements under the Notice are satisfied, the IRS will not treat a leave donor as realizing income or receiving wages, compensation, or rail wages with respect to the deposited leave. This also assumes that donated leave received by the recipient will be treated as “wages” for purposes of FICA, FUTA, and income tax withholding, and as “compensation” for purposes of RRTA and “rail wages” for purposes of RURT, unless excluded under a specific Internal Revenue Code provision. Leave donors may not claim an expense, charitable contribution, or loss deduction on account of the deposit of the leave or its use by a leave recipient.
State leave laws also need to be consulted when implementing these programs.
Employer Provided Disaster Relief
On November 2, 2012, the IRS also alerted employers that because Hurricane Sandy is designated as a qualified disaster for federal tax purposes, qualified disaster relief payments made to individuals by their employer or any person can be excluded from those individuals’ taxable income. Qualified disaster relief payments include amounts to cover necessary personal, family, living or funeral expenses that were not covered by insurance. They also include expenses to repair or rehabilitate personal residences or repair or replace the contents to the extent that they were not covered by insurance. Again, these payments would not be included in the individual recipient’s gross income.
The IRS also announced that the designation of Hurricane Sandy as a qualified disaster means that employer-sponsored private foundations may provide disaster relief to employee-victims in areas affected by the Hurricane without affecting their tax-exempt status.
Leave-Based Donation Program
For past events similar to Hurricane Sandy, the IRS announced in Notice 2005-68 (following Hurricane Katrina) that it would not treat cash payments employers make to certain charitable organizations in exchange for employees’ paid-time-off as gross income of employees if payments are made to relieve victims of the disaster and are paid before a certain date.
Employees who elected to give up paid leave for this purpose could not deduct the value of paid-time-off donated as charitable contributions. If these rules were followed, the IRS would not assert that the opportunity to make this election is constructive receipt of income. Whether the IRS will make a similar announcement for Hurricane Sandy remains to be seen. Again, state leave laws also need to be consulted when implementing these programs.