As the COVID-19 situation continues to put tremendous pressure on people, families, businesses, and the economy, many employers are looking for ways to financially support their employees through this crisis. Tax-advantaged disbursements for qualified disaster relief payments, post-tax emergency funds for additional critical expenses, or other forms of financial assistance/rewards are available for employers to provide to their employees during COVID-19.
IRC Section 139 allows you to offer tax-free funds to employees for qualified disaster relief payments, as long as expenses are for reasonable and necessary personal, family, living, or funeral expenses incurred as a result of COVID-19.
Overview of Section 139.
Section 139 of the Internal Revenue Code states that eligible disaster relief contributions from any source, “including employers, reimbursing or paying individuals’ specified expenses in connection with qualified disasters are not taxable as income and are not subject to employment taxes or withholding.”
The section defines both a qualified disaster and qualified relief payments which are further outlined below.
A Qualified Disaster
A qualified disaster is defined by the following circumstances:
- “results from terrorist or military actions,
- results from an accident involving a common carrier,
- is a Presidentially declared disaster, or
- is an event that the Secretary of the Treasury determines is catastrophic.”
Qualified Relief Payments
Expenses potentially eligible for exemption under section 139, if they are not covered by insurance and are reasonable and necessary, include:
- “Personal, family, living, or funeral expenses incurred as a result of a qualified disaster.
- Expenses incurred for the repair or rehabilitation of a personal residence due to a qualified disaster (a personal residence can be a rented residence or one you own).
- Expenses incurred for the repair or replacement of the contents of a personal residence due to a qualified declared disaster.”
Which expenses qualify?
The IRS has not provided guidance as to which expenses qualify under section 139 with respect to a pandemic like COVID-19. However, according to a recent article published by SHRM, the following expenses potentially qualify:
- Health-related/prevention costs linked to COVID-19 such as over-the-counter (OTC) medications, hand sanitizer, and home disinfectant supplies.
- Increased childcare and home-school expenses as a consequence of school and daycare closures.
- Costs linked to working from home as a consequence of the pandemic such as setting up a home office, increased utility expenses, and higher Internet costs.
- Increased commuting costs incurred while avoiding the use of public transportation, such as taking a taxi instead of using public mass transit.
- Unreimbursed health-related expenses.
However, the premiums should not cover non-essential goods or services. The COVID-19 ongoing pandemic is noted as sufficient enough to warrant a determination under the Robert T. Stafford Disaster Relief and Emergency Assistance Act, which you can learn more about here.
Also featured in the article from SHRM, while an employer is not required to have a formal written disaster relief payment plan, employers should consider creating a policy document outlining different aspects of the program, such as:
- A statement that the program is related to the COVID-19 emergency declaration.
- The eligible employee classes or groups.
- Forms of expenses reimbursed by the employer.
- Reimbursement/payment method.
- Any expense limit set by the employer per employee.
- Name of the administrator and the functions of the administrator, such as discretionary decisions.
- Start and end date of the program.
Show your employees you care.
During trying times such as these, your employees will look to you for help and support. Show them how much you care by delivering targeted financial support via a convenient and easy-to-use debit card. With the Employee Care Card, you can administer your pre-tax and post-tax employee financial assistance programs with maximum flexibility and control.
Click the below links to learn more:
Disclaimer: Please note that this is not all-inclusive. Our guidance is designed only to give general information on the issues covered. It is not intended to be a comprehensive summary of all laws which may apply to your situation, treat exhaustively the subjects covered, provide legal advice, or render a legal opinion. Consult your legal advisor regarding the specific application of the information to your plan.