Date: 1989-11-14
Speaker: TERRY ROGERS (republican)
Chamber: S

Director. Legislative Affairs. American Federation of Government Employees. Washington. DC. DEAR MR. RoGEns: This is in response to a memorandum circulated by Chapter 495 of the American Federation of Government Employees among the employees of a number of governmental entities claiming that the Internal Revenue Service intends to tax governmental employees on vacation and sick pay which has been earned but not yet paid out. This memo. a copy of which is attached. is totally incorrect. It has caused unnecessary concern to many recipients and has prompted numerous phone calls and letters to us from members of Congress concerning the federal income tax treatment of accrued but unused sick and vacation pay earned by governmental employees. For your information. we have enclosed a copy of a fact sheet we have prepared in response to this memo. explaining the basic rules regarding the taxation of vacation and sick pay. Although we cannot determine the source of the incorrect information being circulated. the confusion regarding the taxation of accrued but unpaid vacation and sick pay apparently originated from a misreading of a notice issued by the Service in 1987 regarding the tax treatment of nonelective deferred compensation under section 457. as amended by the Tax Reform Act of 1986. Upon becoming aware of concerns expressed by some governmental employees that they would be taxed on these benefits when they were earned rather than when they were received or paid. the Service issued a revised notice in June 1988. which was essentially codified in the Technical and Miscellaneous Revenue Act of 1988 (TAMRA). This notice and the TAMRA provision specify that certain bona fide benefit plans. Including vlacation leave and sick leave plans. are not deferred compensation plans subject to the section 457 requirements. Furthermore. we should emphasize that section 457. by its terms. Is applicable to employees of state and local governmental units and of taxexempt organizations. but not to employees of the Federal government. Therefore. any concern about the taxation. under section 457. of accrued but unpaid vacation and sick pay (which was resolved in 1988 as explained in the fact sheet) is completely inapplicable to Federal employees. The memorandum also refers to an "H.R. 4221" which is said to be designed to overturn the (nonexistent) IRS decision to tax unpaid vacation and sick pay. Our research indicates that this bill was Introduced in 1988 during the second session of the 100th Congress and died without action at the end of that Congressional session. As explained above and in the attached fact sheet. this bill was not necessary to prevent the taxation of unpaid vacation and sick pay in light of the recently enacted TAMRA provision regarding bona fide vacation and sick leave plans. We hope that you will find the Information In the enclosed fact sheet helpful. and we request that your office immediately inform your local chapters. particularly Local 495. regarding the current state of the law. This may help to allay the fears of many employees about taxation of their benefits. If you have further questions on this matter. you may contact John Tolleris of my staff at 5663000. Sincerely.