How to Establish a PTO Donation Program
Employee interest in paid time off or paid leave banks has increased during the recent global health event.
Paid time off (PTO) donation programs are not new – they have been in place for more than two decades.
Employees like them because they can donate time off to the program without providing cash out of pocket. Employers like them because it provides them with the ability to reduce liability of having too much accrued but unused PTO on the books.
Establishing a PTO donation program has gained popularity in recent years, as a response to various natural disasters impacting the workforce.
PTO donation programs can be complex; therefore, they are not for every organization. Employers must be careful to ensure that employees have enough PTO to use themselves before they can donate it. For example, some companies only allow employees to donate PTO if they have over two-weeks of accrued PTO.
According to CNBC, in 2019 only 28% of Americans planned to use all their vacation days. That leaves a lot of unused PTO.
I've seen three prevalent models for PTO donation:
- Leave bank model
- Leave sharing model, and
- Leave donation to a charitable organization
It is important to note that many factors will influence your decision-making process including considering what works best for your organization. Other factors can range from company culture to related administrative processes and costs.
In a "leave bank" model, employees anonymously donate PTO to a centralized account from which qualified recipients can apply to receive PTO according to the rules of the program.
Under the "leave sharing" model, employees donate their PTO directly to a co-worker in response to a specific emergency as defined by the program.
And under the "leave donation to a charitable organization" model, employees may donate the value of their unused or unwanted PTO to a charitable organization.
All models require these key considerations:
- Culture. Does your company culture promote giving to help boost morale and create comradery?
- Financial. Does your corporation have enough cash on hand to pay out the PTO donated? This is important because both the employee donating PTO as well as the recipient will need to be paid. Also, consider the additional administrative costs for the program.
- Compliance. Donations directly to individuals may be scrutinized for discrimination, therefore, that program design requires proper management. It needs to be fair and equitable, because perception of mismanagement may increase exposure to discrimination claims.
- Policies and Procedures. Is there a limit to how much PTO each employee can donate? It is critical to establish who is eligible to receive PTO donations – define the criteria, length of time, application process, conditions and limitations. Use a systematic approach to determine eligibility, enrollment and the capturing of hours/days/dollars donated. Also, define the administrative and approval process – when and how paid time off will transfer and who is responsible for the tax consequences.
- Impact to pay and any tax consequences – Any leave donated is measured by its cash value. Some may be because of certain medical emergency or natural disaster category and may therefore tax-free. Will your company designate the organization(s) an employee can support through their PTO or can the employee choose for themselves? In general, there are two categories to consider – medical emergencies and disaster plan.
- For medical emergencies, the PTO an employee surrenders to the plan is available only to employees with medical emergencies. And that emergency must meet the requirements of a "qualified medical emergency leave" program and "bona fide employer-sponsored leave-sharing arrangement." Guidance may be found in Revenue Ruling 90-29 ("Rev. Rul. 90-29").
- For a major disaster leave-sharing plan, the PTO surrendered by an employee to the plan is only available to employees adversely affected by any presidentially-declared major disaster. Guidance may be found in IRS Notice 2006-59 ("Notice 06-59").
- Governance. A donation plan can be complicated to administer, so, establish governance prior to implementation to mitigate undue risks.
Regardless of the model you choose, you must manage it in a fair, consistent and equitable manner, just like other aspects of your human resources functions.
How to Get Started
PTO donation programs are a valuable employee benefit, but an appropriate system of record and administration must be included in your launch plans. This may include tools to track employee election, days/hours donated, depleting the donated amount from accrual, collected dollars and the donors contributing them as well as applicable tax implications.
The first step is to establish a cross-functional committee that includes representation from human resources, information technology, finance, legal and from the employee and management groups.
Second, evaluate your human capital management (HCM) system. Ask questions like: Can your open enrollment system be configured to allow employees to donate PTO? Are employees' base wages already captured so the value of PTO days could be calculated?
Other important tasks: create written policies and distribute to all employees; to consider federal, state and local laws, along with industry requirements; to apply the policies consistently; to train managers and employees; to review/update the policy at least annually; and to integrate the administration of the policy with your timekeeping and payroll systems.
Establishing and administering a PTO donation program can be complex, but it will likely be a valued addition to your company's benefit offering.
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