Leave-Sharing Plan

A leave-sharing plan is an employer-sponsored procedure allowing employees to donate unused sick-leave time or other paid time off (PTO) to a charitable pool. Employees who need more leave time due to illness or natural disasters then draw from this pool once if they do not have enough leave time of their own.

Leave-sharing plans help employees who face major surgeries or other medical emergencies, or who suffer a type of catastrophic loss requiring extra time off. Generally, when an employer creates a leave-sharing plan, they also create a panel or committee whose function is to determine who qualifies to receive any donated time, and how much.

Leave-sharing plans sometimes boost employee morale and create a sense of camaraderie and mutual support among employees. However, it’s important that employers structure leave-sharing plans carefully so as not to impose a tax burden on employees who choose to donate their unused time off.

The IRS provides guidelines for employers regarding how to structure leave-sharing plans for tax purposes. If a leave-sharing plan fits the criteria set forth by the IRS, employees receiving additional leave time are taxed for the equivalent compensation that they receive as W-2 income. Employees who donated their time will not be taxed, however.

Employers offering this type of plan need to consider several factors, such as whether to allow employees to direct donate their sick time to particular individuals, and whether to limit the amount or percent of donated sick leave.

Say a company offers all full-time employees 10 sick days per year and 10 personal days, for which they receive full pay. In the past year, two of the company’s employees did not use all of their paid time off. One of them still had three sick days left unused and the other had five left unused. If both employees opt to donate their unused time off to the leave-sharing plan, the leave-sharing plan now has a bank of eight days that the panel in charge of the plan may donate to an employee in need of extra time off.

When a third employee is injured and requires surgery that keeps them out of work for three weeks, the panel elects to donate some or all of those eight banked days to that employee.