Accumulate PTO and IRS

Shadowfax

I posted this on the benefits page, but probably inartfully so. Are there IRS issues with accumulating vacation time (year to year) if the employer permits vacation time to be paid in leiu of taking the time off? This is not a cafeteria plan. If the payoff is always limited to the amount of time earned in any one year, does that help or not? I anxiously await receipt of your accumulated wisdom.

marc

This may not be the in-depth answer, but the IRS treats all of these things on a "cash basis." Meaning no tax ramifications to the EE until actually paid and no tax deduction to the ER until paid. It can be accrued at year end by the company, but must be paid withing a number of days of year-end to be deductible.

System

My understanding is the same as Marc's. The taxes are not payable by the employee or the employer until the cash payment is made.

Shadowfax

Thanks for your thoughts guys. My concern was that if this was done for several years, there could be a significant comp payment accumulated that the IRS might see as deferred comp - but I couldn't find anything to help me one way or another. I'm confess I'm still troubled.

Don D

You do intend to push for a personal cash under-the-table payout, for yourself, do you not?

System

Do you ever undergo an internal audit? If there's no 'cap' on the accumulation, the worst you might be facing is huge payouts.

LarryC

Accrued vacation time will affect your income statement and your balance sheet as an expense and a liability. The IRS will not allow you expense out (deduct) more than 2.5 weeks per employee in a yearly carry over.

Is this kinda what your looking for or did I just cough up a bunch of useless drivel?

Shadowfax

That's exactly the kind of drivel I'm looking for. My concern is that since buy back of vacation under certain conditions in a cafeteria plan is deferred comp and disqualifies the plan - then why would the IRS permit it to be done outside a cafeterial plan. But, since I can[t seem to find anything specifically prohibiting, I guess it will fly, although why we want to is another question entirely. Thanks all.

E Wart

At the end of your fiscal year you are going to have to "accrue" the costs to the company (a percentage) that employees have in the PTO bank since it is a liability.
I would set a limit of time that employees could carry over from one fiscal year to the next (usually anywhere from 40-80 hours). What would be reasonable for you to let a person take at a time. (Normally you only have a couple of employees who have an "excessive" amount of PTO accumulated. Also, can set an amount/limit that you would pay at termination (This is ok in most states.) So if they don't use it and terminate their payout would be limited. I have never heard the IRS get involved in the payout, unless you didn't take out taxes and SS.
E Wart