Tax-Free Disaster Relief Payments
On March 13th, 2020, President Trump declared COVID-19 (coronavirus) pandemic, a National Emergency. The declaration provides a mechanism for employers to provide tax-free disaster relief assistance to employees under Section 139 of the IRS code. Qualified disaster relief payments are exempt from tax withholding, FICA, FUTA, Medicare, and self-employment taxes for all parties if properly structured. The pandemic will be considered a “qualified disaster” for purpose of Section 139 applicability until the president declares that the declared disaster condition has ended.
Section 139 allows for payments of “reasonable and necessary” personal, family, living, or funeral expenses incurred to affected employees and their household, as a result of the disaster. There are various categories of reasonable and necessary reimbursable expenses related to the COVID-19 pandemic. Expense payment categories associated with the COVID-19 pandemic might include, but are not limited to:
-Medical expenses not covered by insurance (co-pays, deductibles, hand sanitizer, home cleaning/disinfectant supplies)
-Child care and tutoring services due to school closings
-Employee work from home costs – setting up home office or increased internet costs
-Increased commuting expenses – public transportation alternatives
-Transportation of transferees or assignees to bring them back to their family
-Temporary lodging for those who cannot reside in their regular home
Although Section 139 contains no requirements for receipts, or limits to the amount or frequency of being requested, employers may want to enforce their own qualifiers or limits to ensure fair and equitable treatment of the benefit, and ensure benefits are not tied to job levels or seniority. Thus, it would be worthwhile for employers to establish a written program to define such things as eligibility, what expenses will be covered, limits or caps the employer wants to place on reimbursements, how an employee can seek reimbursement, the contact information for the person overseeing the program, and how long the program will be in place. In addition employers should clearly state that they reserve the right to alter or revoke the program at any time.
Employers should consider company culture and adopt to the needs of their workforce and business. And as with any new plan, good business practice would suggest consultation with legal and tax professionals to avoid unintended results.