Employers Can Make Tax-Free Disaster Relief Payments to Employees

By declaring a national emergency on 13 March, President Trump triggered provisions of the Internal Revenue code that permit employers to make disaster relief payments tax-free. 

While attention has been focused on broad relief measures recently enacted by Congress, the existing tax code already can be used to assist employees on a tax-free basis. When the President declared a National Emergency on 13 March 2020, he triggered the provisions of Section 139 of the Internal Revenue Code, Disaster Relief Payments, which provides for a broad range of nontaxable relief benefits for employees.

Section 139

Section 139, which was enacted after the 9/11 disaster, overrides the ordinary tax rule that benefits provided to employees by employers are taxable. The section says that “qualified disaster relief payments” are not taxable income but may still be deducted by employers.

A “qualified disaster relief payment” is any amount paid to or for the benefit of an individual to reimburse or pay reasonable and necessary personal, family, living, or funeral expenses, or reasonable and necessary expenses to repair or rehabilitate a personal residence or repair or replace contents, paid as a result of a “qualified disaster.”

Qualified Disaster

A “qualified disaster” is defined, among other things, as “a federally declared disaster.” That term is defined elsewhere in the Code as “any disaster subsequently determined by the President…to warrant assistance by the Federal Government under the Robert T. Stafford Disaster Relief and Emergency Assistance Act.” The President invoked those provisions when he declared a National Emergency on 13 March, thus triggering the relief provisions of Section 139.

Payments as a result of disasters are not income to the recipient unless they are compensated by insurance, or are replacements for regular wages. They are not wages for purposes of employment tax reporting, employment taxes, and the W-2. Although some assistance such as paid sick leave that represents regular wage replacement would not be covered, there is a very broad range of assistance that would be covered. Many planned relocations have been affected by the Covid-19 emergency, and payment or reimbursement of resulting costs should be covered by Section 139.

Examples

Examples of payments that might reasonably be excludable include:

  • Items such as hand sanitizer and home disinfectant supplies
  • Childcare or tutoring due to school closings
  • Work from home expenses, such as setting up a home office, increased utility expenses, higher internet costs, and equipment such as printers and office supplies
  • Higher commuting costs, such as taxis or Uber instead of using mass transit
  • Unreimbursed health-related expenses, such as copays and deductibles
  • Housing and transportation for additional family members (such as college students returning home)
  • Purchase of non-perishable food reserves
  • Temporary lodging, for example for employees, brought back to the U.S. for foreign assignments who cannot occupy their regular home, or who are stranded overseas
  • Help for employees facing difficulty paying rents or mortgages as a result of lower hours or furloughs
  • Temporary food and lodging expenses for employees whose relocation is suspended during the emergency but have already vacated their previous home
  • Other increased relocation expenses such as extra home purchase costs resulting from the emergency

The provision does not have any requirements for substantiation, or any limits on the amount of frequency of payments. However, since payments must be for reasonable and necessary expenses, companies may want to establish some form of substantiation and some company-wide rules for the operation of such a program. For example, it would be useful to require written applications for relief with specific descriptions of the expenses incurred or to be incurred. And employers should consider establishing some form of written employer plan that is communicated to employees.

An unanswered question is whether relief is only for reimbursement of employee expenses, or may include cash advances to pay for covered expenses. Nothing in the statute would, however, limit the form of relief, and companies should assume that cash advances are not taxable provided they are limited to use for reasonably described and anticipated disaster expenses.

Given the significant economic difficulties faced by many employees, employers may wish to take advantage of the ability to financially support them on a tax-free basis.

 

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How This Impacts Mobility

In this time of unprecedented need, employers can use the existing tax code to provide nontaxable relief for employees who face COVID-19 related expenses, including those stemming from relocations that are interrupted, or cancelled, or in which extra costs are incurred. In such cases, employers will also avoid extra gross-up costs.

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