By Mandy Lam
Not only has COVID-19 had a profound impact on public health, but also on the economy – locally, nationally and globally. With no end in sight, employers can look to Section 139 of the Internal Revenue Code as a way to provide tax-free supplemental assistance to employees.
On March 13, 2020, President Trump officially declared the US outbreak of COVID-19 to be a national emergency thereby allowing employers to make tax exempt “qualified disaster relief payments” to employees under Section 139. Qualified disaster relief payments include amounts paid to (or for the benefit of) an individual to reimburse or pay personal, family, living, or funeral expenses that are incurred as a result of a qualified disaster. Note that qualified disaster relief payments, however, do not include: (i) payments for expenses that are otherwise paid for by insurance or other reimbursements; or (ii) income replacement payments, such as the payment of lost wages, lost business income, or unemployment compensation.
Section 139 does not impose any limit on the amount or frequency of qualified disaster payments that an employer can make to any individual employee or to all employees in the aggregate. In addition, the payments remain fully deductible for employers despite not being taxable to the recipients. There is no federal reporting or disclosure, so such payments are not reported on Form W-2 or 1099 and are not subject to federal income or payroll tax withholding.
Many of the requirements that exist for other types of benefits aren’t explicitly mandated for Section 139 payments. Section 139 doesn’t require a written plan, and it doesn’t have specific documentation or anti-discrimination requirements. Nonetheless, we encourage employers to maintain documentation to support reasonable payments.
Employers may consider the following in their disaster relief payment program:
- Which employees are eligible to receive qualified disaster relief payments (i.e.: full time employees, number of years of service, etc.)
- The type of expenses that are reimbursable (i.e.: expenses incurred to allow the employee to work from home, medical expenses not covered by insurance, etc.)
- A dollar limit the employer imposes on Section 139 payments
- The duration of the qualified disaster relief payments
Section 139 benefits won’t be practical for all employers, but it can be a useful part of your company’s response to COVID-19. If you’d like to discuss this or other financial strategies related to the pandemic, please feel free to contact us.