President Trump’s determination that the ongoing novel Coronavirus (COVID-19) pandemic called for a nationwide emergency declaration under the Stafford Act has opened the opportunity for employers to provide tax-free assistance to their employees under Section 139 of the Internal Revenue Code. This is a way for businesses to support their staff during this financially challenging time while also receiving the benefit of that assistance being fully deductible for the business.
Under the Stafford Act, Section 139 provides that gross income does not include any amount received by an individual as a qualified disaster relief payment. So, what constitutes a Qualified Disaster Relief Payment? A qualified payment includes payments made to an employee by their employer that reimburse or pay reasonable and necessary personal, family, living or funeral expenses incurred as a result of a qualified disaster or in this case pandemic. Qualified payments do not include payments for expenses that are otherwise compensated for by insurance or other reimbursements; or income related replacement payments, such as the payment of lost wages, lost business income, or unemployment compensation.
QUALIFIED REIMBURSABLE EXPENSES UNDER SECTION 139
Although there have not been specific guidelines issued as to what type of expenses may be reimbursed tax-free in this context of a national pandemic, the intent behind Section 139 suggests that there are a number of categories of reimbursable expenses that would qualify, including:
- Expenses due to telecommuting (e.g. home office set-up, printer, supplies, internet access, etc.)
- Increased utility expenses
- Cell phone expenses
- Expenses incurred for childcare due to school closures
- Tutoring expenses due to school closures
- Medical expenses not covered by insurance
- Health-related, non-medical expenses (e.g. over-the-counter medication, hand sanitizer, disinfectant, soap)
- Caregiver and domestic service expenses
- Commuting expenses due to work relocation or use of different transportation options (e.g. taxi service vs. public transportation)
- Funeral expenses
- Legal and accounting expenses.
GOVERNING RULES UNDER SECTION 139
The rules governing the implementation of a qualified disaster relief program are intended to be quite simple considering the circumstances surrounding a declared disaster such as the COVID-19 pandemic. As such, individuals are not required to account to their employer for actual expenses to qualify for the exclusion as long as the expenses are reasonable; employers can provide assistance directly to the employee or they can utilize a non-exempt fund created to receive funds from the employer as well as employees to distribute the payments; payments are not required to be reported on a Form W-2 or Form 1099; there is no limit on the amount of reimbursement made to an employee (other than that it is reasonable), and there is no requirement that the employer’s disaster relief program be established in writing.
Although there is no requirement that an employer has a written disaster relief program, employers may find it advisable. Define the key elements of your relief program within your document. Details to include are the class of employees eligible; the type of expenses covered; limits on the amount reimbursable; procedures for applying for reimbursement; contact information for the program administrator; and the start and end date of the program.
Considering the nature and uncertainty caused by the COVID-19 pandemic, Section 139 offers employers a favorable way to provide tax-free supplemental assistance to their employees. If you are interested in learning more about how you can make this work for your small business, we would love to discuss this with you. You can schedule a meeting with Ryan Nguyen through our website.