Section 139 of the Internal Revenue Code allows employers to make and employees to receive tax-exempt payments in times of national emergency for “qualified disaster relief.” The President declaring a state of national emergency on March 13th resulted in the coronavirus pandemic being a federally declared disaster, which paved the way for organizations to provide relief to individuals under this provision. But, given the fact that this is a tax provision and not a health and welfare benefit, you might ask why we are posting a blog on the topic. The answer is simple. We have seen at least one major insurer and several third-party benefits administrators market a platform to support payments by employers under this provision. However, there are a few things employers should know about this section of the tax code first.
Section 139 is not new. The provision was originally enacted in the wake of the terrorist attacks that occurred on September 11, 2001. It is intended to provide a way for organizations, often employers, to provide financial assistance to individuals experiencing financial hardship as a direct result of a disaster. Other past federally-declared disasters include events like hurricanes, flooding and wildfires – the current coronavirus pandemic is the first disaster of its kind to trigger disaster relief.
For payments to be excluded from income and deductible by an employer, payments must be for “qualified disaster relief.” An expense is qualified if it is made to reimburse the reasonable and necessary personal, family, living or funeral expenses incurred as a result of the disaster. In order to be a qualified reimbursable expense, the expense must not be reimbursed by insurance, wage replacement benefits, or otherwise. Some examples of what might be considered reasonable and necessary expenses in the current environment include:
- Medical expenses not reimbursed by insurance
- Home office expenses
- Additional child care expenses
- Mental health and wellness expenses
- Additional expenses from shelter at home orders like masks, cleaning supplies, and hand sanitizers
Employees are not required to substantiate expenses as long as the payments made are reasonable as compared to the actual expenses incurred. However, it is recommended that the employer maintain some level of records that reimbursement was for a qualified disaster relief expense. This could take the form of an attestation from the employee that the employee incurred qualified disaster relief expenses. Maintaining records is where the vendor community can add value – they can record and validate the expenses incurred under Section 139 on an employer’s behalf and they can help limit potential abuse.
If you are an employer considering providing relief to employees under Section 139, it is recommended that you consult your legal counsel or tax advisors for additional guidance. It is unlikely that all of your employees will qualify for disaster relief payments because not all individuals will incur reasonable and necessary expenses as a direct result of the pandemic. Additionally, while these payments are exempt from federal income tax withholding, the same may not be true under state and local tax provisions.
Please contact your HORAN account representative with additional questions.