Relief Payments by Employers to Employees in Connection with COVID-19 Pandemic May Qualify as a Nontaxable Benefit

Qualified Disaster Relief Payments

 

April 8, 2020

Kaylyn Varnum, CPA
Michele Wales, CPA
Mike Batts, CPA

 

Certain types of assistance that employers provide to employees who are affected by a federally declared disaster are exempt from federal income and employment taxes under a special provision of the Internal Revenue Code.  “Qualified disaster relief payments” as outlined in Internal Revenue Code Section 139 include payments by employers to employees for reasonable and necessary expenses incurred for personal, family, living, or funeral expenses as a result of a qualified disaster.

A “qualified disaster” is generally one that is declared by the President of the United States.  On March 13, 2020, President Trump declared a national emergency concerning the COVID-19 outbreak and recently issued IRS guidance clarifies that the COVID-19 pandemic is therefore considered a “qualified disaster” as that term is used for purposes of Section 139.

Section 139 is commonly used in connection with natural disasters such as hurricanes, tornadoes, and floods.  Accordingly, it allows for reasonable and necessary expenses to repair or rehabilitate a personal residence or to repair or replace the contents of a personal residence.  Given the nature of the COVID-19 disaster, it is our view that payments by employers to employees to rehabilitate or repair their homes would not likely be within the scope of Section 139 – since the disaster is not generally causing property damage.

Although the COVID-19 outbreak is a “qualified disaster” for purposes of section 139, qualified leave wages that are paid under the Families First Coronavirus Response Act (FFCRA) are not excludible qualified disaster relief payments, because qualified leave wages are intended to replace wages or compensation that an individual would otherwise earn, rather than to serve as payments to offset any particular expenses that an individual would incur due to COVID-19.  See our separate alert for more information regarding FFCRA payments.

Qualified disaster relief payments are allowable only to the extent that the expenses covered by such payments are not compensated for by insurance or otherwise.  As an example, if an employee receives federal financial assistance in connection with the COVID-19 pandemic that covers his/her reasonable needs, a payment by the employer to the employee to cover those same needs would not meet the definition of a qualified disaster relief payment under Section 139.

The provision of assistance by an employer to an employee can be in the form of cash or services and requires no substantiation from the employee.  The minimal administrative requirements allow employers to react quickly to help the immediate needs of their employees.  While the law allows for no substantiation to be collected by the employer from the employee, we recommend that employers maintain reasonable documentation of their own supporting their belief that the aid meets the definition of qualified disaster relief payments.

Examples of possible employer qualified disaster relief payments might include reasonable payments for:

  • Medicine or medical care costs incurred by an employee for the employee, his or her spouse, or dependents to treat COVID-19 and not covered by insurance;
  • Funeral expenses incurred by an employee in connection with a death caused by COVID-19; and
  • Childcare or other personal expenses necessary in response to school or childcare closures caused by COVID-19, not covered by other types of reimbursements (insurance, government aid, etc.).

If an employer has an employee who is incurring such expenses as a result of COVID-19, this special provision may allow the employer to assist the employee in covering such costs in an efficient manner and without creating taxable income to the employee.

 

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