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December 9, 2020
As the COVID-19 pandemic continues, we are all acutely aware of its impact on employees and their families. On March 13, 2020, the pandemic was declared a national emergency. At that time, the door opened for tax-free assistance from employers to their employees under section 139 of the Internal Revenue Code. This benefit applies to any federally declared disaster, not just COVID-19.
Section 139 allows employers to provide their employees with disaster relief funds for certain unreimbursed expenses incurred because of the disaster. These payments cover “reasonable and necessary” personal, family, living, or funeral expenses that are not reimbursed from another source (like insurance or national disaster relief payments). The payments are tax-free (not subject to income or employment taxes) for both the employer and the employee.
The IRS has not issued specific guidance regarding what type of expenses would be reimbursed for the COVID-19 pandemic; however, the underlying purpose of section 139 suggests that there are several categories of eligible expenses, such as:
This list could include lodging, clothing, food, transportation, and repair of a personal residence and all its contents for other disaster types.
The funds cannot be used for:
The rules governing the implementation and administration of the section 139 plan are meant to be simple and straightforward, so employers can easily utilize it when a disaster occurs. This allows for easy administration in that:
These are not ERISA plans, so there is no requirement that the employer’s disaster relief program be established in writing. However, we recommend that employers create a plan document or policy that outlines their intent in the event of a disaster. This could be as simple as:
You can set up an account and ask that employees apply for funds or you can make reasonable payments for expected expenses, such as a set amount for all who work at home, for example. We have some clients that established a policy specific to the pandemic, with no current intent to establish the same for future disasters, knowing that they can easily create a new policy if they want to provide future assistance.
Section 139 disaster relief programs provide employers with a tax-favored way to help their employees in a time of need. They allow tremendous flexibility and the process is simple and straightforward for employers that want to establish one. Consult with a knowledgeable employee benefits advisor to explore the available options.
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