Does your company allow cashouts of PTO time as a regular employee ben

[Guest Denise Holmes]

Our company lumps vacation & sick time together, for PTO. Currently, we do not allow employees to cash out unused PTO time. If your company allows a "cash out" of PTO time, I'd be very interested in knowing the policy...is it allowed annually? just for some percentage of the total time? other?

If applicable, please also share any background on the business reasons for enabling a cash out policy, especially if it relates to a high-tech manufacturing environment.

Note: I am NOT talking about cashing out FTO time for terminated employees.

Thanks in advance for any responses.

[Sheila K]

Denise:

We had always minimized the amount of vacation time that could be carried over at the end of the year. If the vacation accrual was over 80 hours, then the employee had to cash out enough hours to get to 80. When we went to our PTO program 1/1/99, we decided that since we were enriching the benefit, we would decrease that amount of payout.

What we have done is kept the 80 hour carryover limit, but given the employees three options for the amount of hours over 80. They can:

1. Receive cash for the PTO hours over 80, at a 75% payout. (If I have 40 hours extra, I get paid for 30)

2. Transfer excess PTO hours to their RSB (reserve sick bank) at a 100% basis (1 hour PTO = 1 hour RSB). BTW, this is very popular with folks planning on maternity/paternity leave! RSB is NEVER cashed out, but if they know that they can use it, then this is a GREAT benefit!

3. Donate any excess hours to the hardship fund. We have a "pool" of PTO hours that can be used when there is a hardship situation for an employee who has used all paid time during an emergency. These excess hours are also at 1:1 ratio.

Please feel free to call or e-mail me if you would like more information.

[JWK]

Sheila:

Are there tax implications that need to be considered in offering the election between a cash out and transfer of the PTO hours to other uses? I'm thinking especially of constructive receipt. How have you dealt with those? Thanks.

[Guest ronc]

We have a PTO plan similar to Sheila's. PTO carryover varies by length of service, from 80 hours to 200 hours. Excess PTO is transferred to a Sick Time Bank (STB)that can only be used for employee sick leave beyond the first 3 days an illness. The STB has a 720 hour cap. Currently, hours that would be in excess of 720 are lost (however, most employees in that situation request that the PTO that they would have lost be donated to the Leave Share program).

PTO is cashed out at termination at 100% up to the carryover limit and STB is cashed out at 25% but only if the employee has at least 5 yrs of service.

We are considering amending the plan to allow cashouts for hours that would be lost due to the STB cap. Most likely at 25% of value.

By the way, our PTO rollover is at the end of Sept. When does your rollover take place and what are the pluses and minuses for that time of year?

Ronc

[Guest CLKeown]

Originally posted by JWK

Sheila:

Are there tax implications that need to be considered in offering the election between a cash out and transfer of the PTO hours to other uses?  I'm thinking especially of constructive receipt.  How have you dealt with those?  Thanks.

JWK,

I don't believe there are any constructive receipt issues here. Since PTO time is a 'fringe benefit', and while you may accrue time based on a set schedule, you don't 'earn' the wages. Because you are not 'earning' the money the earnings are not available to the employee for any reason or at any time other than:

1. Utilization of PTO for vacation, illness or personal time.

2. The allowed "Cash" out period.

Basically it is the same issue as carrying over PTO time. If you accrued 80 hours in 2000 then in January 2001 you take 80 hours of vaction time (before you accrue any 2001 time) you certainly are not subject to constructive receipt because you 'earned' those hours in the prior year.

If the payout period is January for all eligible time carried over from the prior year then you are not eligible to recieve that pay at any other time. Thus no constructive receipt issue.

However, I believe that according to IRS Pub. 15 and 15A, a lump sum payout of vacation time or PTO time would be construed as "supplemental wages" and would need to be taked at the supplemental wage rate of 28%.

HTH,

Carole

[JWK]

Carole:

I agree with your points, but the part that concerns me about Sheila's plan (as I understand it) is the employee's ability to make an election to either cash out their PTO or to transfer it to another account (the reserve sick bank) for later use. It seems to me that the IRS would argue that the employees who elected the transfer had the opportunity to receive the cash and so should be taxed as if they received it, i.e., a constructive receipt analysis.

I'm more comfortable with ronc's arrangement, where upon reaching the 720 hour cap, the choice is forfeiture or donation to Leave Share Program (i.e., no choice to receive current compensation).

Maybe the answer is that the 25% reduction under Sheila's plan is a substantial restriction on the right to receive the compensation, so the constructive receipt issue is avoided (sort of a haircut provision). I'm not sure the IRS is receptive to this line of argument.

[Guest CLKeown]

JWK,

I still think you'd be okay here. You are opting to either take a cash out option OR roll over the benefit into a similar benefit plan with no cash out option.

I would agree with you if the Reserve Sick Bank had a cash out option. In which case I can see that the constructive receipt issue would apply.

However, in this instance you have only one opportunity to take a cash out. Otherwise you would only be paid for the time under qualified absences. Therefore you are utilizing the benefit, but not recieving it as 'cash'.

It seems that this would be clear. I have seen this type of plan in serveral places - mostly in medical facilities like hospitals and other care facilities - and a cash out or roll-over option is not at all uncommon.

Carole

[Guest dheap]

You might want to examine Shultz, and Gisonny, "Avoiding Constructive Receipt Is Essential in Vacation Buy/Sell Plans," 3 J. of Tax'n of Employee Benefits No. 3, 105.

[Guest AMP]

It's my understanding of the constructive receipt rules that once you have an opportunity to receive cash, you are subject to income tax on that amount, whether you elect to receive it or not (unless substantial restrictions apply, such as haircuts). In addition, you cannot elect to defer the receipt of taxable compensation from one tax year to another, which is what happens when you elect to not take the cash and leave the PTO available for use in a subsequent calendar year.

We've "reformed" a number of PTO programs that had optional cash out elections to eliminiate the constructive receipt issue created by the cash out option. We generally recommend that a PTO program either cash out all unused time at the end of the year, or roll all unused time over with no cash option, although there are other program designs that provide for limited cash outs.

The thing you have to keep in mind is that if the IRS decides to review your program and finds a constructive receipt issue, the employees who get hurt are the ones who DIDN'T take the cash because they wanted to keep the time off available. They're the ones who would be subject to income tax on income they didn't actually receive.

[Christine Roberts]

AMP - when you say "reform" these PTO programs, do you mean rewriting and obtaining a PLR on the revised arrangement? Or some other process?

[Guest AMP]

By "reforming" PTO programs, I mean we've redesigned them on a prospective basis to eliminate the constructive receipt issues. We usually don't correct prior years, primarily because it's extremely complicated as well as an employee relations and communications nightmare to issue corrected Forms W-2 and tell employees who didn't elect to cash out in prior years that they should have been subject to income tax when they had the cash out opportunity, even if they didn't take the days off until later years.

We haven't requested a PLR on any of the PTO programs we've redesigned, because the employers have generally opted for program designs that clearly don't result in any constructive receipt issues (no cash outs or no rollovers). There have been a few program designs that are not as clear cut, but the employers have opted to not request a PLR.

[Christine Roberts]

The IRS did address this issue in PLR 9009052. It contains a good discussion of what type of plan features give rise to "substantial limitations or restrictions" preventing constructive receipt, and what type of plan features do NOT provide such protection.

[Guest kstitts]

For those of you with the Leave Share Program or hardship fund, how do you manage this? Does an employee apply for this paid time off? Does the manager? IS there a limit to the number of hours an employee can use under this plan? Does HR grant it? If two employes need the same bank of hours, what is the decision process for granting the time off? Is this information kept on-line via an HRIS or payroll system, or it is managed off-line?

Thanks for any responses.

[Christine Roberts]

Can anyone hazard a guess as to the level of IRS enforcement activity, if any, that there is in this area (i.e., constructive receipt of accrued, unused PTO)? I would appreciate hearing from you.

[Guest sterk]

I am contemplating changing my present policy of separate vacation time, sick time, and personal time into one category, and am wondering if anyone can indicate where some survey information or other industry trend information may be found.

[Guest DebbieH]

I work for a small (1400 employees) high tech company in New England. We are researching the impact that changing our current vacation/sick/holiday banks would have if we switched to a PTO plan. I am also researching this topic for my fall research paper in my master's program. It seems that several companies have adopted this method of accrual. My questions are to employees/employers who have adopted this method and can report on the results.

1. What kind of impact did this have on your company financially- did you realize gains?

2. What kind of impact did this have on the employees- did they see it as a positive incentive?

3. What kind of impact did this have on the use of the PTO leave- did you see more/less use?

4. What kinds of cash outs do you use, if any, and can employees do this annually or at the end of their employment?

5. If you have an STD plan, what is the cap of sick time allowed?

Please add any thoughts/comments on the transition of the plan.

Thanks for your help in advance!