The IRS recently released Notice 2020-46, providing favorable tax relief for “leave-based donation programs” designed to aid victims of COVID-19 pandemic. Under these programs, employees may elect to forgo vacation, sick, or personal leave in exchange for payments that the employer makes to charitable organizations described under section 170(c). Under this notice, payments employees elect to forgo do not constitute income or wages of the employees for federal income and employment tax purposes if the employer makes the payments, before January 1, 2021, to charitable organizations for the relief of victims of the pandemic. The IRS will not assert that an opportunity to make this election results in employees’ constructive receipt of the payments. Accordingly, an employer would not need to include the payments in Box 1, 3 (if applicable), or 5 of the Forms W-2 for employees electing to forgo their vacation, sick, or personal leave.
With respect to employer deductions, the notice provides that the employer may deduct the cash payments under the rules of section 170, which provides rules for deductions for charitable contributions, or under the rules of section 162, if the employer otherwise meets the requirements of the applicable section. Accordingly, the deduction will not be limited by the percentage limitation under section 170(b)(2)(A) or subject to the procedural requirements of section 170(a), if the employer deducts the payments under section 162. In general, payments made to charitable organizations pursuant to leave-based donation programs are deductible to the extent the payments would be deductible under section 162 if paid to the employees (i.e., the payments would have constituted reasonable compensation and met certain other requirements).
The requirements of Notice 2020-46 are straightforward, but if an employer fails to comply, the general tax doctrines of assignment of income and constructive receipt would apply. Under these doctrines, if an employee can choose between receiving compensation or assigning the right to that compensation to someone else, the employee has constructive receipt of the compensation even though he or she never actually receives it. Applied to a leave donation program, the principles would result in an employee being taxes on compensation that the employee assigns to a charitable organization, and the employer would have corresponding income and employment tax withholding and reporting obligations. Although the employee would be entitled to take an itemized deduction for charitable contributions in that amount, this below-the-line deduction only affects income taxes (and not FICA taxes), and would not fully offset the amount of the income for non-itemizers who claim the standard deduction ($12,200 for single filers and $24,400 for joint filers in 2019). A smaller above-the-line donation was enacted as part of the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act that is available regardless of whether the filer itemizes deductions.
Leave donation programs are only one tool to employers and their employees to respond to the COVID-19 pandemic. For example, Notice 2006-59 provides favorable tax treatment for “leave-sharing plans” that permits employees to deposit leave in an employer-sponsored leave bank for use by other employees who have been harmed by a major disaster. (See earlier coverage.) As we have previously reported, employers may provide tax-free qualified disaster relief payments to their employees under Section 139 to cover expenses incurred as a result of the pandemic. Qualified disaster relief payments include payments for reasonable and necessary personal, family, living, or funeral expenses, among others. The payments may be made directly by an employer or through company-sponsored private foundation or public charity. On June 19, the IRS provided guidance on provisions in the CARES Act that provide for easier access to funds in qualified retirement plans in Notice 2020-50. The notice followed earlier guidance in the form of FAQs on the IRS website and Notice 2020-42, which provided relief from in-person spousal consent requirements applicable to qualified retirement plans.