When disasters like the COVID-19 pandemic strike, companies look for ways to help employees make it through the crisis. One of the ways employers can help employees who are experiencing financial hardship due to COVID-19 quarantine or stay-at-home orders is by making qualified disaster relief payments that are tax-free under Internal Revenue Code Section 139.
Qualified disaster relief payments are not included as part of an employee’s income and are deductible by his or her employer. Payments are made “to reimburse or pay reasonable and necessary personal, family, living, or funeral expenses incurred as a result of a qualified disaster.” A “qualified disaster” is one that has been declared as such by the federal government and according to the IRS, the COVID-19 pandemic qualifies.
Expenses Covered by Qualified Disaster Relief Payments
Any Section 139 payments to employees must be for expenses incurred as a result of the COVID-19 crisis. Permissible expenses include but are not limited to:
- Travel expenses incurred by an employee who is now driving to work instead of taking public transportation;
- Lodging expenses if an employee or an employee’s family member must live somewhere else temporarily to avoid exposure to a family member diagnosed with COVID-19;
- Delivery fees for groceries and meals;
- Medical expenses not reimbursed by insurance;
- Funeral expenses if an employee or an employee’s family member dies from COVID-19; and
- Personal protection items such as face masks, gloves, and hand sanitizer.
Reimbursable expenses from insurance or other sources are not covered, nor are expenses for nonessential items or services. In addition, qualified disaster relief payments cannot replace lost wages or paid time off.
Making Qualified Disaster Relief Payments to Employees
Qualified disaster relief payments can be made to employees as reimbursed expenses (up to a limit) or as a lump sum based on an estimate made by the employer of expenses an employee has incurred. Payment may be made by:
- Direct payments to employees via their regular paycheck;
- Through an existing or newly established donor-advised fund within a public charity; or
- Through an existing or newly established private foundation.
The IRS does not require substantiation for these tax-free payments to employees, so employers do not have to document individual expenses. However, payment amounts are expected to correspond to unreimbursed COVID-19-related expenses that are necessary and reasonable. Employers may administer this program in-house or outsource the administration to a third party provider.
At Hall Benefits Law, we work extensively with employers to adhere to applicable reporting requirements and avoid costly penalties that result in substantial harm to your business. Call 678-439-6236 to discuss your concerns with an experienced attorney.
Hall Benefits Law, LLC
