When President Trump formally announced that the COVID-19 pandemic was a national disaster, he opened the way for employers – businesses and nonprofit organizations alike – to make tax-free payments to employees who incur COVID-19-related obligations that are not reimbursed by insurance or otherwise.
Section 139 of the Internal Revenue Code provides that any “qualified disaster relief payment” does not constitute taxable income to an individual.
Qualified Disaster Relief Payments
A qualified disaster relief payment is any amount paid to an individual to reimburse or pay for reasonable and necessary “personal, family, living, or funeral expenses” incurred as a result of a national disaster. Under the President’s declaration that the COVID-19 outbreak is a national disaster, payments received by employees from their employers to cover expenses incurred as a result of COVID-19 constitute a qualified disaster relief payment excludable from income to the extent that these expenses are not otherwise reimbursed or compensated for by insurance or otherwise.
Individuals who receive such payments are not required to account for actual expenses in order to qualify for the exclusion (such as provide receipts to substantiate such expenditures), so long as the employer’s program contains requirements to ensure that the relief payments are reasonably expected to be commensurate with the amount of unreimbursed reasonable and necessary expenses incurred by the employees as a result of COVID-19.
At present, expenses reasonably believed by an employer to result from the COVID-19 outbreak that are not covered by insurance may include:
- Medical expenses and critical care
- Childcare and tutoring expenses due to school closings
- Internet and other remote connectivity fees
- Cell phone fees
- Funeral expenses
Employers should be aware that qualified disaster relief payments are not intended to indemnify the employee regarding all disaster related losses and may not be used as income replacement or to compensate for lost wages. Neither are they intended to reimburse employees for the cost of nonessential, luxury or decorative items and services. In addition, IRS guidance indicates that such payments should be made available to all eligible employees regardless of length or type of service with the employer.
Employer Guidelines
There is no requirement for an employer to have a written qualified disaster relief payment policy. That said, employers may want to consider establishing guidelines and procedures to inform employees regarding the reimbursement process and for collecting and evaluating requests for relief. Elements of any such policy may include:
- Employee eligibility requirements;
- Expenses that may be paid or reimbursed by the relief payments (or categories of expenses that qualify for assistance);
- Any per-employee or per-expense reimbursement limits;
- Time-frame for the program; and
- A requirement that each employee requesting assistance submit an application that includes: (i) the reasonable and necessary expense, (ii) an acknowledgement that the expense is not reimbursed or compensated for by insurance or otherwise, and (iii) that the payment is not compensation for lost wages or income replacement.
Employers who wish to support their employees during this time of national crisis may find that making qualified disaster relief payments to their employees helps to boost morale and productivity. Private foundations affiliated with a business enterprise may also make qualified disaster relief payments to the employees of that business pursuant to the requirements of section 139 of the Internal Revenue Code.
Should you need assistance or have any questions concerning Tax-Free Disaster Relief Payments to Employees, contact Sharon C. Lincoln at lincoln@casneredwards.com or (617) 426-5900.
