Tax experts are dusting off a little-used tax opportunity (enacted in 2002 following September 11th attacks) that is coming in handy for businesses dealing with COVID-19 today. Section 139 allows employers to make “qualified disaster relief payments” to employees to assist in managing their expenses during the COVID-19 pandemic. The payments are fully deductible to the employer, and also tax-free to the employees.
While businesses cannot make a “gift” to employees without taxation (it classifies as compensation), Section 139 allows for tax-free “payment” to employees under a federally declared disaster. Therefore, beginning immediately, employers are able to provide tax-free payments to employees for “reasonable and necessary personal, family, living, or funeral expenses” incurred as a result of COVID-19. The employer may then claim a full deduction for the payments.
Stipulations to Section 139 disaster relief are that payments are not covered if they are used to replace lost income, or if employees’ expenses are otherwise compensated for by insurance. (Sick pay or family medical leave remains fully taxable for the employee.)
Tax-Free Payment Qualifications
While there are details within the determinations applied to meet the definition of “qualified disaster relief payments”, here are some general guidelines for acceptable payments as related to employee COVID-19 expenses:
- Tax-free benefit inclusions: To reimburse or pay reasonable and necessary expenses that the employee incurs due to a qualified disaster, the employer may pay for:
- Medical expenses of the employee not compensated for by insurance (such as deductible and out-of-pocket expenses)
- Over-the-counter medications and hand sanitizer costs
- Funeral costs (for an employee or a member of an employee’s family)
- Costs of an employee to work from home during COVID-19 (computer, cell phone, printer, supplies, increased utility costs)
- Child care or tutoring expenses for family members not permitted to attend school throughout the pandemic
- Lump sum grant allowed: An employer can set a dollar amount it pays to employees, as long as that amount is a reasonable estimation of expenses it expects employees to incur.
- No service requirement: Any employee may qualify during this time, regardless of time of service.
- No receipts required: An employer does not have to account for actual expenses or administer this like an expense reimbursement plan – so long as the payment amounts are reasonably expected.
- Plan document is needed: A written document needs to be adopted by the company, containing requirements of employees to ensure that amounts paid under the plan are reasonably expected to be commensurate with employees’ unreimbursed additional expenses.
Contact a K·Coe tax advisor for questions on applicability for this tax opportunity. Visit K·Coe Isom’s COVID-19 Resources & Updates page for more helpful guidance.