COVID-19 has upended our daily lives, and many companies are searching for ways to aid their employees through the ongoing challenges of the moment. Thankfully, there is a little-known tax provision (IRC Section 139) which provides for disaster relief payments that can help employers support their workers.
In a federally declared disaster, IRC Section 139 allows employers to provide employees with disaster assistance on a tax-free basis to the employee, and the employer receives a tax deduction as well.
About the Provision
On March 13, 2020, President Trump issued an emergency declaration under the Robert T. Stafford Disaster Relief and Emergency Assistance Act in response to the ongoing COVID-19 pandemic.
As a result of that federal disaster declaration, employers may now reimburse or pay their employees for reasonable and necessary personal, family, living, or funeral expenses incurred. Any COVID-19 related payments made to employees under this provision are federally tax-free to the employee and fully deductible to the employer. These payments do not include any payments made for compensation, including paid sick or family medical leave, or expenses otherwise reimbursed by insurance. These payments are not included on a Form W-2 or 1099 and are not subject to federal income or payroll tax withholding.
There is no requirement that the employer have a written plan, but it is strongly recommended. The plan might include who is eligible, what types of expenses qualify, thresholds by type of expense and/or by employee, any documentation needed, how to request the payment, and how the payment will be made. There is no limit on the amount or frequency of the payments.
There is also no requirement the employee provide documentation to support the expenses claimed, but it is strongly recommended the employee provide paperwork or a signed statement verifying the expense.
Generally, states follow the federal treatment for qualified disaster relief payments. Employers may want to confirm their respective state follows the federal rules for income tax and unemployment insurance tax purposes.
Examples of COVID-19 Related Expenses
Some examples of COVID-19 related expenses include unreimbursed medical costs, over-the-counter medications, funeral costs, increased childcare/tutoring (due to school closings, remote learning or home schooling), working from home expenses (computers, monitors, scanners, cell phone, supplies, increased utilities/internet, etc.), sanitation supplies, or increased transportation costs (from lack of access to public transportation) as a result of COVID-19.
In these uncertain and stressful times, the tax-free disaster relief payments available through IRC Section 139 can be a great way to help your workforce, as well as assist the company with operations, efficiency, and garnering employee goodwill/support.
Please contact your Clark Nuber professional or Rene Schaefer with any questions.
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