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Who can forget the events of Hurricane Katrina last August and the horrible aftermath? IRS has not, recently clarifying rules for employees sharing vacation time with other employees in need. This guidance is timely as the hurricane/tornado season approaches.
Issued in June, Notice 2006-59 confirmed what many employers already assumed: individuals who donate accrued leave to other employees impacted by a major disaster have neither taxable income nor a tax deduction for making a donation. Also, the leave is taxable income to those recipients.
The President has legal authority to declare major disasters. Employers who want to offer this benefit must establish a written plan that meets eight requirements:
- The plan allows employees to deposit leave for “severe hardships”, suffered either by employees or their family members, requiring a period of absence from work.
- Donors may not specify who receives the leave.
- Donors may not give more than their annual accrued leave amount.
- Each recipient receives leave equivalent to his or her normal rate of compensation for purposes related to the major disaster.
- The plan must have reasonable limits on how long after the major disaster recipients may use the donated leave.
- Recipients may not convert the donated leave into cash. They may use the donated leave as a means to reduce or eliminate a negative leave balance and as a substitute for unpaid leave.
- Employers must use reasonable discretion in approving the amount of leave for each recipient.
- Once the major disaster period has passed, any remaining donated leave must be returned to all donors on a proportional basis.
IRS’ position is similar to what it expounded more than 15 years ago in Revenue Ruling 90-29, relating to leave donations for employees who suffer medical emergencies. Prudent employers should review leave of absence policies to ensure that they address the above requirements. An electronic version of this Notice is available at: www.irs.gov/pub/irs-drop/n-06-59.pdf.
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