Amid the COVID-19 pandemic, many employers are looking for tax-advantaged ways to help their employees with additional expenses incurred as a result of the pandemic.
Section 139 of the Internal Revenue Code provides the answer. On March 13, 2020, President Trump declared COVID-19 a national disaster under the Robert T. Stafford Disaster Relief and Emergency Assistance Act. Section 139 of the Internal Revenue Code allows employers to make tax-free “qualified disaster relief payments” to employees during a federally declared disaster.
What are the benefits of making “qualified disaster payment” to employees? If an employer makes qualified disaster relief payments to employees, these payments are not subject to income tax withholding, FICA or FUTA, and are not required to be reported on an employee’s Form W-2. Employers also benefit from the “qualified disaster relief payments” as the payments are fully tax-deductible by the employer. Also, employers are not subject to FICA or Medicare tax on these payments.
What type of payments are “qualified” under Section 139? Qualified payments include reimbursements or direct payments for reasonable and necessary personal, family, living and funeral expenses, among other things.
Factors and Considerations:
Under Code Section 139, there is little formal guidance from the IRS for employers that are eager to assist employees by making qualified disaster relief payments. Employees are not required to substantiate actual expenses provided the employer reimbursements are reasonable and commensurate with the expenses incurred.
Examples of permissible expenses include, but are not limited to, the following:
- Increased commuting costs
- Expenses associated with working from home
- Grocery and meal delivery fees
- Unreimbursed medical expenses
- Critical care and funeral expenses
- Protective items, such as hand sanitizer, face masks, and gloves
To qualify, the expenses simply must be incurred “as a result of” the COVID-19 pandemic and an employer cannot reimburse or pay expenses which are compensated by insurance or otherwise. Additionally, the payments cannot be a replacement for wages or employee bonuses.
Payments and Substantiation:
Disaster-related payments by employers can take the form of (1) a direct reimbursement to an employee on an expense-by-expense basis or (2) a lump sum payment that reasonably estimates the amount of expenses the employee has incurred.
Unlike other employer-provided tax-free reimbursements, there are no express substantiation requirements for these payments. Employers are not required to collect and review receipts and related documentation of expenses. Employers may continue to make disaster relief payments to employees until the COVID-19 pandemic is declared to no longer be a qualified disaster.
Qualified disaster relief payments may be implemented with minimal formal administration. Nevertheless, employers should consider several factors when implementing such a payment program.
An employer should consider adopting a written policy that outlines the program requirements including, but not limited to, the following:
- Who will be eligible for payments?
- What evidence will be required?
- What types of expenses will be subject to reimbursement or payment?
- How will the payments will be made?
- How will payments be documented?
- What is the start and end date of the program?