3-26-20 Client Alert - Federal Disaster Status Allows Tax-Free Payments to Employees

On March 13, 2020, President Trump declared the novel coronavirus (COVID-19) a federal disaster under the Stafford Act. As a result, this triggered the benefits of Section 139 of the Internal Revenue Code which provide employers the opportunity to provide tax-free qualified disaster relief payments to employees for reasonable and necessary expenses resulting from the pandemic. In addition to being tax-free to the employees, employers are entitled to a corresponding tax deduction and the payments are not subject to federal income or payroll tax withholding or reporting.

Qualified disaster relief payments include payments to or for the benefit of the employee that are reasonably expected by the employer to reimburse or pay reasonable and necessary personal, family, living, or funeral expenses incurred as a result of a qualified disaster. Qualified disaster relief payments do not include (1) payments for any expense compensated by the payment of insurance or some other form of reimbursement; (2) wage replacement such as sick leave; and (3) unemployment compensation or other payments in the nature of income replacement.

Reimbursable expenses or in-kind payments associated with COVID-19 must be reasonable, necessary, and incurred as a result of COVID-19. As such, these will likely take many different forms including, but not limited to, the following: unreimbursed medical expenses, health-related expenses such as over-the-counter medications and hand sanitizers, child care or tutoring due to school closings, home office set-up costs, increased cell phone or utility costs, or transportation expenses due to work relocation.

Qualified disaster relief payments do not need to be paid pursuant to a plan document. Nonetheless, given the tax-free status for qualified disaster relief payments, we suggest those employers that choose to provide such payments should consider adopting an administrative system that validates that the payments meet the Section 139 requirements. For example, such a system can include (a) a short application form for assistance that validates the disaster for which relief is sought; (b) an affirmative statement from the employee that the requested funds are necessary for expenses associated with COVID-19; and (c) an affirmative statement that the expense is not reimbursable by insurance or any other form of reimbursement.

Many states including New York follow the federal tax treatment of Section 139. Other special rules may apply. We are available to discuss the benefits of Section 139 and can assist in the implementation of an appropriate administrative system.

For more information regarding Coronovirus (COVID-19) or to access all of our client alerts go to:

https://www.woodsoviattgilman.com/practices/covid-19-multidisciplinary-crisis-group

Please contact your Woods Oviatt attorney or the following attorneys regarding COVID-19 related issues:

COVID-19 Multidisciplinary Crisis Group Co-Leaders