PTO Donation - California Practitioners, Only!

[Christine Roberts]

California employer wants to allow employees to "donate" unused paid time off/vacation pay to fellow employees who experience a catastrophic event (death, illness) for which they are financially ill prepared. Donated hours are converted to cash if the donee employee's immediate need is cash rather than time away from work. Here is the California employer's dilemma:

1) to avoid donating employees' experiencing constructive receipt for federal income tax purposes, the employer must impose a "substantial restriction or limitation" at the time accrued, unused hours are donated to the program. On the assumption that a 25% "haircut" is a "substantial" restriction or limitation, many plans therefore discount the hours by 25% at the time of donation.

2) under California labor law (see Labor Code Sec. 227.3), forfeitures of accrued, unused vacation time are prohibited. The "haircut" is by its very nature a forfeiture.

Are any California benefits or tax practitioners aware of a way to accommodate these conflicting tenets? I would appreciate any and all comments.

[Harwood]

UCLA seems to have a donation-of-hours program.

http://www.chr.ucla.edu/chr/ppaa/uclaproc/append3.htm

[Christine Roberts]

That may be because UCLA is a state entity and may not have to worry about the prohibition on forfeiture of accrued, unused vacation.

HOWEVER, another thought has occurred to me - Cal. Labor Code 227.3 only prohibits forfeiture of vacation pay upon termination of employment. It does not expressly prohibit a voluntary forfeiture the employee elects. So it may be that there is not an inherent conflict between the "haircut" provision needed under federal law to avoid constructive receipt, and California's anti-"use it or lose it" provision.

Additional comments appreciated.....

[oriecat]

According to IRS Pub 15-A:

If you establish a leave sharing plan for your employees that allows them to transfer leave to other employees for medical emergencies, the amounts paid to the recipients of the leave are considered wages. These amounts are includible in the gross income of the recipients and are subject to social security, Medicare, and FUTA taxes, and income tax withholding. Do not include these amounts in the income of the transferors. These rules apply only to leave sharing plans that permit employees to transfer leave to other employees for medical emergencies.

Seems to me that if you carefully qualified what is eligible then you won't even need to do the 'haircut'.

[Christine Roberts]

Thanks for this comment. I wonder if this provision is limited to leave sharing in the event of medical emergencies, or if other types of catastrophes (death in family, fire, etc.) are covered. Also raises the question of whether the process of determining eligibility creates an administrative scheme such that the leave sharing program becomes an ERISA plan.

[GBurns]

oriecat,

I thought that you were in a state other than California. State of the union, that is, not state of mind.

[oriecat]

I'm in OR & WA, but read up quite a bit on CA issues, since it's right next door and you never know when the boss will decide to move south. (Oh how I hope he never does...)

[Christine Roberts]

It turns out that the assignment of income problem is the bigger hurdle here. Transferring the cash value of unused vacation time to other employees would most likely constitute an assignment of income such that it would be included in the taxable compensation of the donating employee, rather than the donee. The IRS carved out a very small, time-limited exception to the assignment of income rule following 9-11, to allow employers to establish plans that transferred the cash value of unused leave to charitable organizations related to the disaster. See

See 2001-64 and 2001-69, which were applicable to contributions made before January 1, 2003. In Notice 2003-01, the Service declined to extend its ruling to contributions made after 2002, and also declined to amend Treasury Regulations under Internal Revenue Code Section 61 to exclude leave-based donation programs from the assignment of income doctrine.

[GBurns]

Are you saying that this issue is an IRS issue, not a California only issue? Well, wa do ya know and who woulda thunk?

[oriecat]

I don't think those notices are an equivalent situation. That had to do with employees donating the dollar value of leave time to charitable contributions that the employer would then make on their behalf. For example, if I said take 8 hours of my PTO and give it to the United Way. It wasn't a leave sharing program for employees. The quote that I posted from Pub 15A is still valid and was contained in Revenue Ruling 90-29. But you could always get a private letter ruling from the IRS with the details of your plan and see what they say.