IRS Notice 2021-42 (June 30, 2021)
Available at https://www.irs.gov/pub/irs-drop/n-21-42.pdf
The IRS has announced a one-year extension of the special tax relief for leave-based donation programs aiding victims of the COVID-19 pandemic. Under a leave-based donation program, an employer may permit its employees to give up their vacation, sick, or personal leave in exchange for cash payments by the employer to charitable organizations. Ordinarily, such donations must be included in the donating employee’s income, and the opportunity to elect such contributions raises the concern that eligible employees might be taxed on amounts they could have donated (due to the doctrine of “constructive receipt”). IRS Notice 2020-46 offered relief from both tax issues, but only for donations made before January 1, 2021 (see our Checkpoint article).
In light of the ongoing nature of the COVID-19 pandemic, IRS Notice 2021-42 extends the same federal income and employment tax treatment to donations made through the end of 2021 as applied during 2020. Under the relief, timely cash payments to qualified tax-exempt organizations (as described in Code § 170(c)) that are made by employers in exchange for employees’ forgone vacation, sick, or personal leave will not constitute income to the employees if the payments are made for the relief of victims of the COVID-19 pandemic in the specified geographic areas (including all 50 states, the District of Columbia, and Puerto Rico). Also, the mere opportunity to make a leave donation will not result in constructive receipt of income for employees.
EBIA Comment: This extension arrives somewhat late in the game—possibly too late for employers that have not already established a leave-based donation program. But for those with such a program, this extension will be a welcome affirmation that the favorable tax treatment of leave-based donations can continue, at least for cash payments made during 2021. For more information, see EBIA’s Fringe Benefits manual at Sections XXII.E (“Leave-Sharing and Other Donation Programs”) and XXII.B.2 (“Tax Trap: Giving Employees the Choice to Cash Out Vacation/PTO Days Can Create Tax Problems”). See also EBIA’s Cafeteria Plans manual at Sections III.B (“The Constructive Receipt Doctrine and the Code § 125 Safe Harbor”) and III.G (“Constructive Receipt and Cash-Out of Unused Vacation Days”).
Contributing Editors: EBIA Staff.