On March 13, 2020, President Trump declared a national emergency under the Robert T. Stafford Disaster Relief and Emergency Assistance Act (the “Stafford Act”) in response to the Coronavirus Disease 19, or COVID-19. This declaration allows employers to make qualified disaster relief payments to employees affected by COVID-19 on a tax-free basis pursuant to Section 139 of the Internal Revenue Code (the “Code”).
Qualified Disaster Relief Payments
Employers can provide direct financial assistance on a tax-free basis to employees who are affected by a “qualified disaster” under Code Section 139. “Qualified disaster relief payments” are exempt from federal income tax and employment taxes and deductible by the employer if the payments reimburse or pay for reasonable and necessary personal, family, living or funeral expenses (not otherwise compensated for by insurance) incurred by the employee as a result of a qualified disaster. A “qualified disaster” includes a federally declared disaster under the Stafford Act. There is no limit on the amount of the disaster relief payments that may be provided to an employee.
No regulations or other guidance have been issued on the type of expenses and under what circumstances reimbursement or payments may occur. However, income replacement/lost wages, such as paid sick leave, and payments/expenses that are compensated by insurance or other sources, are not covered by Code Section 139. In addition, under Internal Revenue Service guidance (Revenue Ruling 2003-12), because of the extraordinary circumstances surrounding a qualified disaster, individuals will not be required to account for actual expenses in order to qualify for the Code Section 139 income exclusion, provided that the amount of the payments can be reasonably expected to be commensurate with the expenses incurred.
Although there is no requirement for the employer to have a written qualified disaster relief payment plan, employers should consider establishing procedures to inform employees of the reimbursement process and for collecting and reviewing requests for relief. Factors to consider include:
- Which employees will be eligible for reimbursement;
- Whether specific types of expenses will be reimbursed;
- Whether the employer will impose a per-employee reimbursement limit;
- Start and end date for reimbursements;
- Requirement for employees to sign an application form explaining the reasonable and necessary expense and acknowledging that the expense is not being paid from any other source (insurance or other sources) and that it is not being paid for lost wages/income replacement.
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