Taxation of Accrued, Unused PTO

[Christine Roberts]

PLR 9009052 states that accrued paid time off is includible in an employee's income when not subject to substantial limitations or restrictions. "Limitations & restrictions" include maintaining a minimum number of accrued hours, a maximum number of accrued hours (above which hours are automatically converted to cash & distributed to employee) and the requirement that hours be cashed in in blocks of, for instance, 40 or more. What is not clear is whether a 40 hour block of time that can be cashed out, but is not cashed out, is taxed twice: once when it is "included in income" because not cashed out, and again when it is actually converted to cash and distributed to the employee. Any comments on or experience with this issue?