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Qualified Disaster Relief Payments – Taxability of employer provided benefits in a Federally Declared Disaster

IRC Section 139 provides that a “qualified disaster relief payment” is not included in taxable gross income for the recipient. This section covers various types of qualified disaster relief payments, but this write-up focuses solely on those payments made by employers to employees.  Under this code section,  payments paid by an employer to an employee are not taxable to the employee, while remaining deductible by the employer.  Historically, this section has been used in disasters causing significant property damage, like a hurricane, earthquake, or terrorist attack.  In light of the recent COVID-19 pandemic, questions have arisen regarding whether §139 may be used by employers to help their current employees in the current health and economic emergencies.

Section 139 kicks in when there has been a “federally declared disaster” enacted under the Robert T. Stafford Disaster Relief and Emergency Assistance Act as defined in Section 165(i)(5)(A). President Trump issued such an “emergency declaration” related to the COVID-19 pandemic on March 13, 2020 covering “all states, tribes, territories, and the District of Columbia.”

Specifically §139 allows any payments made to an affected party to be tax-free by the recipient to reimburse or pay for the following expenses that are not otherwise compensated for by insurance:

    1. Reasonable and necessary personal, family, living, or funeral expenses incurred as a result of a qualified disaster; or
    2. Reasonable and necessary expenses incurred for the repair or rehabilitation of a personal residence or repair or replacement of its contents to the extent that the need for such repair, rehabilitation, or replacement is attributable to a qualified disaster; or
    3. By a person engaged in the furnishing or sale of transportation as a common carrier by reason of the death or personal physical injuries incurred as a result of a qualified disaster; or
    4. Amounts paid by a Federal, State, or local government or agency to promote the general welfare.

Based on the above definition, an employer could reasonably provide employee assistance for the following items on a tax-free basis, while still deducting the payment under IRC §162. Please note the payments must be made for expenses not covered, or reimbursed by, insurance and must be related to COVID-19.

  1. Medical expenses and supplies.
  2. Other personal or family supplies including cleaning supplies and hand sanitizer.
  3. Increased telecommuting costs.
  4. Child care for workers where child care is unavailable.
  5. Funeral expenses.

The statute does not require a formal written plan, nor do current IRS regulations, however, a thorough reading of Revenue Ruling 2003-12 suggests that an employer put together a plan documenting the policies and procedures related to such payments.  Such policies and procedures should include:

  1. Specify the disaster to which the program relates, including a start and end date to the program;
  2. A description of every eligible employee class;
  3. A list of the types of expenses included in the program;
  4. Specify that payments cannot be used nonessential costs and services, and must be in a reasonable amount;
  5. Specify the process for which the employees must request reimbursement or payment;
  6. Specify which employee has authorization to administer the program and whether that employee has decision making authority;
  7. Determine a per item or aggregate limit to the amount of expenses paid or reimbursed.

To reiterate, we are in uncharted territory related to this type of disaster declaration.  However, based on the current law and limited guidance as it stands today, we believe that employers should be able to pay or reimburse employees for these noted expenses without any tax consequences to the employees, while providing the employers with a tax deduction.  We will keep you informed of any changes in the guidance, if any, issued by the Internal Revenue Service.

Disclaimer: This post was current as of the date of posting.  Any changes made to the law or regulations since original posting has not been incorporated.  Please view the recent postings for current information or contact us directly with any questions.