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Qualified Disaster Relief Payments as Tax-Free Benefit to Employees

Natalie Tocco

March 25, 2020

On March 13, 2020 President Trump declared a national emergency under the Stafford Act related to the COVID-19 pandemic.  Under Internal Revenue Code Section 139, an employer can make certain tax-free reimbursements to employees (“qualified disaster relief payments”) related to a federally declared disaster.  The tax-free payments to employees are fully deductible expenses to the employer.

Qualified disaster relief payments include:

  • Reimbursing or paying reasonable and necessary personal, family, living, or funeral expenses incurred as a result of a qualified disaster
  • Reimbursing or paying reasonable and necessary expenses incurred for the repair or rehabilitation of a personal residence or its contents to the extent attributable to a qualified disaster

Qualified disaster relief payments do not include any wage replacement such as paid sick leave.  Any wage replacement paid to an employee is not considered a qualified disaster relief payment and is not tax-free to the employee.

While federally declared disasters have typically been related to natural disasters, such as hurricanes or floods, employers can provide qualified disaster relief payments related to COVID-19, including:

  • Medical expenses not reimbursed by insurance
  • Non-medical expenses such as over-the-counter medications or hand sanitizer
  • Childcare due to school closings
  • Tutoring expenses due to school closings
  • Cell phone expenses
  • Transportation expenses due to work relocation
  • Funeral expenses as a result of COVID-19
  • Increased home expenses due to teleworking i.e. home office set-up, internet, supplies, and utility costs

Employer provided home office expenses such as printers, monitors, cell phone, and other related equipment have long been considered a working condition fringe benefit, the value of which is excluded from taxable wages of the employee, as long as the equipment is returned to the employer and the equipment is primarily for business purposes.  Any personal use is considered de minimis and excluded from taxable wages of the employee.  Qualified disaster relief payments do not change this tax-free benefit.

Qualified disaster relief payments can be made to all employees regardless of how long they have worked for the employer.  Section 139 does not mandate a formal written plan; however, we would recommend an employer maintain documentation for any qualified disaster relief payments including eligible classes of employees, types of expenses to be reimbursed, method for reimbursement, employer imposed limits per employee, and the date range for issuing qualified payments.

Contact us with any questions regarding disaster relief payments.

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