07 Apr 2020 Tax-Free Disaster Relief Payments for Employees
A Little Used IRS Code Section Applicable Now for Businesses!
Internal Revenue Code Section 139 was initially created as a result of the 9/11 attacks. The intent was to allow employers to provide “qualified disaster relief payments” to their employees without it creating a tax burden, but still be allowable as a deduction to the employer. Though this benefit technically has nothing to do with the CARES Act, the related disaster declaration has opened the opportunity to utilize this benefit for certain expenses unrelated to payroll.
These would be payments “to reimburse or pay reasonable and necessary personal, family, living, or funeral expenses incurred as a result of a qualified disaster” not otherwise covered by insurance. Payments are not allowed for any amount that relates to lost income, wages, severance pay, etc. The payments can be made directly to vendors or as a reimbursement to an affected employee.
A written Disaster Relief Payment Plan document is not required nor is an employee required to account for the actual expenses incurred. From a practical, common-sense standpoint, we advise employers to have a written plan and at a minimum, document records of all payments made and request underlying receipts reflecting the nature of the expenditures. Non-discrimination rules do not apply, and no dollar limit applies.
Accepted expenses might include:
- Medical expenses (not covered by insurance) such as employee deductibles, out of pocket expenses, caregiver, over the counter medications, hand sanitizers, protective gloves/masks and so on
- Funeral expenses for an employee or an employee’s immediate family who dies from a COVID-19 infection
- Cost of an employee’s childcare or tutoring as a result of closed facilities
- Costs related to enabling an employee to work from home including computers, printers, cell phones, high-speed internet and possibly even increased costs of utilities as a result of working from home
Qualified payments made to employees under this little-known provision will be tax-free to the employee, not reportable on a W-2 or 1099 while still being deductible to the employer.
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