Understanding Employee Disaster Relief Payments During COVID-19
The COVID-19 pandemic has brought forth unexpected financial hardship for countless people in the United States. As a result of this public health crisis, the government has recently passed legislation to provide aid to the American public.
On March 13, 2020, former President Donald Trump made an emergency declaration to provide tax relief solutions to American citizens in response to the COVID-19 pandemic. Afterward, the Coronavirus Aid Relief and Economic Security Act (CARES) was enacted on March 27, 2020. Under the IRC Section 139, employers can make tax-free reimbursement payments to employees that are incurring increased expenses as a result of the pandemic. This is a mutually beneficial agreement since employers can claim the payments as a tax deduction and the employee isn’t required to report them as taxable income. In this article, we will focus on the provisions found in IRC Section 139, which allow employers to provide disaster relief payments to employees.
Understanding Section 139
Section 139 was initially enacted following the attacks on September 11, 2001 as a way to provide relief to families affected by the disaster. It states that gross income shall not include any amount received by an individual as a qualified disaster relief payment. These payments are ultimately tax-free for employees and fully deductible for employers.
The Internal Revenue Code defines a “qualified disaster” as an incident caused by terroristic or military action, a federally declared emergency, or an incident considered to be of catastrophic nature by the IRS or federal, state, or local governments. Due to former President Trump declaring the COVID-19 pandemic as a national emergency, it was officially made eligible for disaster relief.
A disaster relief payment is defined as a payment made to or for the benefit of an individual with the intent to reimburse such individual for any reasonable and/or necessary personal, family, living or funeral expenses caused by the qualified disaster. This includes reimbursements to pay for repairs to a personal residence and any government-funded aid.
What Constitutes a Qualified Disaster Relief Payment?
Although the IRS has yet to issue much guidance for qualified disaster relief payments related to COVID-19, we can use previously qualified disaster relief payments to determine which costs are likely to be covered under Section 139. These potentially include:
- Meals: If employees spend additional money on grocery delivery as a result of the pandemic, these costs may be eligible for reimbursement.
- Medical expenses: Any medical expenses not covered by health insurance, such as over-the-counter medicines and hand sanitizers, are likely to qualify for reimbursement.
- Lodging or temporary housing: Employees or family members diagnosed with COVID-19 that are required to quarantine can likely be reimbursed for the temporary housing expenses.
- Child care: Any additional or increased child care, tutoring, or homeschooling expenses may be eligible for reimbursement if they are a result of the pandemic.
- Travel and transportation: Any costs that an employee may incur while finding alternate transportation to avoid public transport may be eligible for reimbursement.
- Funeral expenses: Expenses related funeral costs following the death of an employee or their loved ones are likely to be covered.
Other expenses related to safety, such as the purchasing of face masks, hand sanitizers, and gloves, may also be covered. If you need help determining whether or not a payment would qualify as a relief payment, do not hesitate to ask for assistance from a tax professional.
What Expenses Are Not Covered?
Wages do not qualify for disaster relief payments; therefore, anything an employer pays an employee must be either above or beyond their expected paycheck. Furthermore, an employer’s payments to an employee for COVID-19 related expenses must be reasonable to the amount of expenses expected to be incurred by the employee. This also applies to the amount paid to employees who are ineligible to work due to causes related to COVID-19. Lastly, expenses compensated by insurance or other reimbursements cannot qualify for disaster relief payments.
Tax Impact
As businesses navigate the pandemic and look for ways to help employees, Section 139 may provide an opportunity for both parties to mutually benefit. An employee’s qualified disaster relief payments are not subject to federal income tax or federal employment taxes. Section 139 also does not require employees to achieve a certain period of service to be eligible for tax-free payments under this provision. The employer is not required to collect any receipts from their employees either; however, they are encouraged to document:
- Their intention for payments
- A listing of all reimbursed expenses
- A listing of the payees and amount paid to each
Employers interested in making tax-exempt Section 139 payments to employees should consider adopting a written plan that outlines what expenses are eligible for disaster relief and what payments are deemed reasonable. Employees can also be reimbursed on an expense-by-expense basis or with a lump sum payment to cover costs they’ve either incurred or can expect to incur later on. Payments can be processed along with an employee’s paycheck, through a donor-advised fund, or via a private foundation.
Act As Soon As Possible
In these difficult times, financial aid is crucial and time-sensitive. If you are an employer who is in the position to assist employees, we encourage you to act now. Employers or employees who have questions surrounding Section 139 should contact Coast One Tax Group immediately. Our team of tax professionals is ready to assist you and answer your questions.