Covid-19 Leave-Based Donation Program Necessitates Strict Compliance With Safe Harbor

On June 11, 2020, the IRS issued Notice 2020-46 (the “Notice”) permitting employers to claim a charitable contribution deduction under Section 170(c) of the Internal Revenue Code of 1986, as amended, for cash payments to charities amounting to paid leave donated by employees. Alternatively, even if the requirements for a Section 170(c) deduction are met, an employer may deduct the payment as an ordinary and necessary business expense under Section 162(a). Also, under the Notice, payment of donated leave to a Section 501(c)(3) tax-exempt organization will not be treated as wages subject to employment excise taxes, tax withholding or wage reporting. Moreover, a leave-based donation program may be exempt from most employee benefit plan requirements under the Employee Retirement Income Security Act of 1974, as amended ("ERISA") as a payroll practice if it meets certain conditions. The Notice sets forth several conditions for exclusion of foregone paid leave from gross income or wages of donor employee and deductibility of the payments by employer. First, the payment by the employer must be made in cash. Second, the cash payment has to be in exchange for vacation, sick or personal leave foregone by employees. Third, an employee must elect to forego the paid leave. Fourth, the cash payment of foregone leave must be made to a Section 170(c) organization for the relief of victims of Covid-19 in the affected georgraphic areas. Fifth, an employer must make the cash payment of foregone leave to a Section 170(c) relief charity before January 1, 2021. The Notice, or the predecessor IRS guidance does not set forth any specific operational requirements for an employer-sponsored leave-based donation program, other than the five factors generally outlined above. The leave-based donation program established under the Notice is not statutory, and does not clarify tax authorities for excluding the payments from gross income of donor employees. The safe harbor in the Notice is an exception to two general tax principles for inclusion of amounts in gross income of a taxpayer under Section 61(a), the common law assignment of income doctrine devised by federal courts in interpreting Section 61 and the constructive receipt doctrine codified in Section 451. Thus, the IRS has assumed effectively a noneforcement position with respect to general tax treatment of foregone paid leave of a donor employee in the safe harbor. Therefore, employers may find advisable to draft and implement a leave-based donation program in strict compliance with the safe harbor and applicable ERISA exemption requirements to avoid adverse tax or ERISA consequences of participation in the charitable relief program.