Tax Implications of the Family Leave Pool

Overview

Applicable to

State agencies and institutions of higher education.

Background

The 87th Legislature enacted House Bill 2063, which adds Subchapter A-1 to Chapter 661 of Government Code, establishing a state employee family leave pool to give eligible state employees more flexibility to bond with and care for their children during the first year following birth, adoption or foster placement, and to care for a seriously ill family member or themselves, including for pandemic-related illnesses or complications caused by a pandemic.

Under these new provisions, state agencies must establish a family leave pool that allows an employee to voluntarily transfer sick or vacation leave earned by the employee to the pool. Employees will be eligible to apply for leave from the pool for any of the following reasons after exhausting their own eligible compensatory, discretionary, sick and vacation leave:

• The birth of a child.
• The placement of a foster child or adoption of a child under 18 years of age.
• The placement of any person 18 years of age or older requiring guardianship.
• A serious illness of an immediate family member or the employee, including a pandemic-related illness.
• An extenuating circumstance created by an ongoing pandemic, including providing essential care to a family member.
  — or —
• A previous donation of time to the pool.

Sources

Texas Government Code, Section 661.021-661.026.

Tax Implications

Based on a review of Internal Revenue Service (IRS) Revenue Ruling 90-29 and IRS Private Letter Ruling 152644-06_WLI01, this new leave pool may not qualify as a bona fide employer-sponsored leave sharing plan for medical emergencies afforded special tax treatment by the IRS, which exempts donations of leave to the leave pool from the general assignment of income rule. Therefore, there may be tax consequences for employees who choose to donate leave to this pool.

The Comptroller’s office cannot provide legal guidance or determine compliance with IRS guidelines based on each agency’s implementation of the family leave pool. Each agency should carefully review the statutory provisions as well as the IRS guidelines to determine the appropriate tax treatment of leave donated to and taken after being awarded from the agency’s family leave pool.

Agencies that determine an employee incurs a tax liability by donating leave to its family leave pool must manually adjust the donor employee’s taxable wage record to ensure proper tax withholding and quarterly and annual tax reporting.

To aid in the manual adjustment of the employee’s tax record, the Comptroller’s office has created a new taxable non-cash earnings code. This code adjusts the employee’s taxable wage base for the pay period in which it is recorded but does not adjust the employee’s actual gross pay.

Additional Resources

See CAPPS Family Leave Pool Tax Instructions for more information about entering this tax adjustment.