When the COVID-19 pandemic was declared a national emergency earlier this year, it triggered Section 139 of the Internal Revenue Code.
Under Section 139, employers can provide tax-free payments or reimbursements to employees for certain expenses associated with a qualified disaster — such as the COVID-19 crisis.
Section 139 delivers a straightforward way for you to assist employees facing hard times because of the pandemic. However, your payments must be “qualified” under the IRC.
What are qualified disaster relief payments?
Per IRC Section 139(b), qualified disaster relief payments include amounts provided to employees to help them pay for “reasonable and necessary personal, family, living, or funeral expenses incurred as a result of the qualified disaster.”
Which disaster relief payments are tax free for COVID-19 purposes?
When it comes to the COVID-19 pandemic, qualified disaster relief payments may include:
- Over-the-counter medications, hand sanitizers and home disinfectant supplies.
- Work-from-home expenses — such as home office setup costs and increased utilities and internet costs.
- Tutoring or child care resulting from school closings.
- Higher transportation costs — such as using a rideshare service from home to work instead of public mass transit.
- Increased unreimbursed health care-related costs.
- Temporary housing.
- Caregiver costs.
- Counseling expenses.
Which payments are excluded?
- Qualified wages — such as hourly wages, salaries, bonuses and commissions — because they are compensation made to employees for services rendered. Such wages are subject to employment taxes.
- Paid sick or family leave and other types of paid leave. These are essentially wages, from which taxes must be withheld.
- Expenses covered by insurance.
What makes a qualified disaster relief program ‘simple’?
- No federal income tax, Social Security tax or Medicare tax withholding. States also generally do not require state tax withholding from qualified disaster relief payments. Still, employers should check state law for any exceptions.
- No federal (and likely state) reporting of Form W-2, as the payments are excluded from the recipient’s gross income.
- No payment cap. Section 139 does not limit how much in qualified disaster relief payments you can offer or how frequently you may do so. The payment needs only to be “reasonable and necessary.”
- Qualified disaster relief payments are fully tax deductible by the employer.
- No written plan required. You do not have to develop a formal written plan document for the qualified disaster relief program, unlike with other benefit programs such as 401(k) and group health plans.
- Employees do not have to submit proof of their expenses in order to receive qualified disaster relief payments, though you can require substantiation if you prefer.
Despite requiring hardly any record-keeping obligations, it’s best practice to adopt a written plan outlining the parameters — including eligibility and payment criteria — of the disaster relief program. If you have questions about how disaster relief payments can be used at your company, contact us.