Qualified Disaster Relief Payments
How Does it Work? IRS Code Section 139 was enacted as a response to the attacks on September 11, 2001. The primary purpose is to allow employers to make “qualified disaster relief payments” to its employees in a manner that is tax-free to the employee but deductible to the employer. Qualified payments include amounts to reimburse or pay reasonable and necessary personal, family, living, or funeral expenses incurred as a result of a qualified disaster. Recently issued guidance by the IRS indicates that the Shelter-in-Place orders and other governmental actions taken as a result of COVID-19 meet the definition of a qualified disaster for purposes of this provision. Potential Qualified Payments Only certain types of employer payments qualify. It should be noted that Code Section 139 has never been used for a national pandemic and, historically, it has only been used for local disasters, such as hurricanes, floods, and tornadoes. The general guidelines are clear that payments made to replace lost income (such as payments for sick leave or family medical leave) are not eligible. In addition, services that would be paid by the employee regardless of the disaster (such as costs for food) would not be considered eligible. By contrast, special expenses incurred relative to a COVID-19 quarantine or illness (temporary housing and delivery services) would likely be considered qualified relief payments to employees. Plan Criteria It is presumed that a formal written plan must be adopted (while no formal regulations exist, IRS guidance does exist that provides an overview of the plan criteria that should be included in such a program). It includes five (5) elements as follows:
1. Statement of the disaster to which the program relates 2. Description of which employees are eligible to receive the grants 3. Description of the expenses that may be covered by the program 4. Statement of when the program will end 5. Description of any other administrative requirements
How is it Taxed? When provided as part of a Qualified Disaster Relief Program, qualified payments are not taxable to the employee. Payments must be for expenses that are not covered by insurance or otherwise reimbursable. Can Relief Payments be Made Now? As above, this program requires the declaration of a Major Disaster by the state. For the COVID-19 pandemic, California, Colorado, Connecticut, Florida, Iowa, Louisiana, New Jersey, New York, Texas, and Washington have approved major disaster declarations.
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