Many employers are focused on helping employees impacted by Hurricanes Harvey, Irma and Maria. These disasters, plus the earthquakes in Mexico should prompt employers to prepare for the next disaster, particularly since Southern California is overdue for a large earthquake. Responding to a disaster and preparing for the next disaster takes many forms.
Group health plans are required by the Health Insurance Portability and Accountability Act (HIPAA) security regulations to have data backup plans, disaster recovery plans and emergency mode operations plans.
New guidance from the Internal Revenue Service (IRS) permits employers to waive the restrictive rules usually imposed on loans and hardship distributions from tax-favored retirement plans. The guidance also permits employers to adopt leave-based donation programs to facilitate contributions to charities assisting victims of the disasters. In addition to the new relief, employers may also make “qualified disaster relief payments” directly to employees under certain circumstances.
Under general tax principles, a vacation donation program would result in a tax to the employee making the donation as the IRS would view the donating employee as having been in constructive receipt of the amount. However, there are certain arrangements that allow employees to donate vacation and paid time off (PTO) without incurring taxes.
Notice 2017-48 allows employees to donate vacation sick or personal leave in exchange for cash payment that the employer makes to eligible charitable organization. As long as certain requirements are met, the employee is not subject to tax on the value of the leave and it will not be included in income. The employee is not entitled to a charitable deduction; however, the employer may be eligible for a deduction for the donation.
Many employers have policies that allow employees to donate vacation or other leave to co-workers (such as when an employee needs medical leave, parental leave, leave related to a disaster, etc.) It is possible to structure these programs so that the employee who donates the leave is not taxed (the employee who uses the leave will be subject to ordinary income tax on the value of the leave). However, to be tax advantaged the employer donation program needs to meet certain requirements such as it be used for a declared natural disaster or medical emergency. The plan must be in writing. In the case of the current hurricanes, the leave must be used before January 1, 2019.
While there are advantages to implementing a paid-time-off donation policy, there are still many factors to consider before doing so. Employers have several decisions to make about eligibility and amounts.
Employers must decide which employees can donate leave and if there are caps on the amount of leave that one employee can pass on to another.
Employers should create a policy that addresses these and other potential issues. The decision to make leave donation available to employees ultimately depends on the company’s culture. It is much easier to have a leave program in place before disaster strikes than to try to create one while recovering from a disaster.
The Department of Labor (DOL) has said that it recognizes that plan participants and beneficiaries may encounter an array of problems due to the hurricanes, such as difficulties meeting certain deadlines for filing benefit claims and COBRA elections. The guiding principle for plans must be to act reasonably, prudently and in the interest of the employees and their families who rely on their health plans for their physical and economic well-being. Plan fiduciaries should make reasonable accommodations to prevent the loss of benefits in such cases and should take steps to minimize the possibility of individuals losing benefits because of a failure to comply with pre-established timeframes.
In addition, the DOL has said that it acknowledges that there may be instances when full and timely compliance by group health plans may not be possible. The DOL’s approach to enforcement will be marked by an emphasis on compliance assistance and include grace periods and other relief where appropriate, including when physical disruption to a plan or service provider’s principal place of business makes compliance with pre-established timeframes for certain claims’ decisions or disclosures impossible.
In other hurricane-related news, the IRS is granting relief to individuals and businesses in Florida, Georgia, Puerto Rico, the Virgin Islands and part of Texas. The relief postpones various tax deadlines to January 31, 2018.