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Employers Council members often inquire about how to handle PTO or leave approvals for employees who have exhausted all their accrued leave. One effective approach for employers to support workers in need of time off is by implementing leave-sharing plans.

Leave-sharing plans are employer-sponsored initiatives that enable employees to donate unused PTO, vacation, and/or sick time into a collective pool. The pool, or leave bank, can be accessed by colleagues facing medical challenges or experiencing hardship due to a declared emergency or a natural disaster.

Benefits of Leave-Sharing Plans

A carefully planned and well-administered leave-sharing program can provide multiple advantages in the workplace, including the following:

• Decreased absenteeism: These programs support employees in managing personal or family emergencies by offering additional time off.

• Enhanced employee motivation and engagement: Participation in leave-sharing initiatives can improve morale and strengthen a sense of community among staff.

• Strengthening employer brand: Implementing leave-sharing options demonstrates a commitment to employee well-being, helping attract and retain top talent.

• Improvement in financial management: Such programs can reduce large accrued paid time off liabilities on the company's balance sheet.

Types of Plans

Although leave-sharing plans can offer advantages for both employers and employees, they must be carefully designed to prevent adverse tax implications for employees who donate their unused paid time off. The Internal Revenue Service (IRS) has issued guidance regarding two types of leave donations that avoid triggering tax consequences for donor employees: the medical emergency exception and the major disaster exception.

The following is a brief overview of each type of plan. For a more in-depth explanation, please see Employers Council’s leave-sharing whitepaper.

Medical Emergency Exception

A medical emergency is defined by the IRS 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 due to the exhaustion of all paid leave available, apart from the leave-sharing plan.”

Plans for the purposes of medical emergencies should be in writing, administered by the employer, and offer clear instructions for employees donating and wishing to use leave. Here is a summary of some other considerations:

• The plan should specify a cap on the amount of leave that may be donated to the pool.

• The plan should limit the use of the leave to medical emergencies of employees or their family members requiring extended absences.

• The plan should indicate that leave received from the pool will be paid at the employee’s normal rate of compensation.

• The plan should indicate that recipients are required to first exhaust all other PTO or paid leave. 

Major Disaster Exception

Employers can create a tax-favorable leave-sharing plan to be specifically used by employees adversely affected by a major disaster or emergency declared by the president of the United States. For the plan's purposes, an employee is considered to be adversely affected by a major disaster if the disaster has caused severe hardship to the employee or a family member of the employee that requires the employee to be absent from work.

These plans must be written and shared with employees. The following is a summary of some other requirements:

• A leave donor may not deposit leave for transfer to a specific recipient.

• The amount of leave that may be donated by an individual in any year does not generally exceed the maximum amount of leave that an employee accrues during the year.

• A leave recipient may receive paid leave at their normal rate of compensation.

• A recipient may not convert any leave received under the plan into cash instead of using the leave.

• Leave deposited because of a major disaster may be used only for employees affected by that major disaster.

Starting a Program

Before a program can be implemented, an employer needs to draft a written leave-sharing policy that outlines the aspects of the program, including the following:

• To avoid claims of discrimination, state that leave is donated to a general pool of time off for employees in need instead of allowing donations directly to specific employees.

• Define the eligibility of the donor and the recipient. This might include, for example, work tenure and/or a certain amount of time in their bank.

• Define what time off an employee can donate (e.g., vacation and sick time, or sick time only) and define a minimum and maximum amount of time recipients can receive from the bank. Require the employee to exhaust all other time off available to them before requesting time off from the pool.

• Most likely, the employee donating the time off and the recipient will not have the same pay rate, so you’ll need to decide whether to provide time off on an hour-for-hour basis, no matter the difference in pay rate, or on a value basis. The whitepaper mentioned earlier in this article provides an example of how to determine value.

• Employers Council’s attorneys and HR consultants can help you navigate the rules of leave-sharing plans. If you have any questions or need assistance, please contact us.

Ruth Rusongoza is a human resources consultant for Employers Council.