IRS Clears Way for Paid-Leave Donations

Workers who want to donate the value of paid leave time to charity won’t face tax penalties, at least through 2002, the Internal Revenue Service said Wednesday.

Following the Sept. 11 terrorist attacks, several large employers began considering programs that would allow workers to forgo paid vacation, sick leave or personal time in exchange for the employer’s sending a donation to relief organizations, the IRS said.

However, under existing law, such donations would fall under “assignment of income” rules designed to stop high-income taxpayers from shifting earnings to friends and relatives in lower tax brackets.

Under the assignment-of-income rules, an employer would report the value of any donated time off as income earned by the employee. The employee would be subject to income, Social Security and Medicare taxes on that “phantom” pay.

That created concerns for employees at Health Net, a Woodland Hills-based health-care company that asked the IRS for a ruling.

Health Net workers are allowed to either use or accumulate their paid days off. Several workers wanted to know if they could simply have the company send the value of their paid time off to relief organizations in the wake of the attacks. However, the tax penalties were a potential hindrance, company officials said.

The IRS said Wednesday that it would suspend the assignment-of-income rules for donations of vacation time, sick leave or personal days made to charitable organizations before Jan. 1, 2003.