It’s hard to believe March 13 marks the one year anniversary of when the U.S. declared a national emergency as a result of COVID-19. Overnight, many employers and individuals were forced to adapt to remote working environments, school closings and remote learning — while some also dealt with illness and loss. As we cautiously see a light at the end of the tunnel from a public health perspective, the impact and stress to many has been seemingly endless.
Fortunately, employers can do more to help struggling employees if they choose. A change made to the Internal Revenue Code (Section 139) as a result of the September 11, 2001, tragedy provides a tax-free benefit to employers making qualified disaster relief payments to employees. As the pandemic has been declared a national emergency, payments to employees after March 13, 2020, are eligible. An employer can deduct payments made to employees, and the payments are completely tax free to the employee.
What Type of Payments Qualify as Disaster Relief?
The provision most relevant to the COVID-19 pandemic is that employers can reimburse reasonable and necessary personal, family living or funeral expenses incurred as a result of the qualifying disaster. This provision will not only allow employers to provide much needed help to families dealing with severe illness or death, but it can also provide broader assistance to reimburse employees for personal costs such as:
- Home office expenses
- Over-the-counter medicine and sanitation products
- Childcare and tutoring
While there is no restriction on how much businesses can offer in aid, note that this opportunity cannot be used as a form of disguised compensation.
What Documentation is Required to Take Advantage of Disaster Relief Payments?
Unlike some tax-free benefits, Section 139 does not require employees to document how they used the funds. Employers only need to reasonably expect that the amount paid is reasonable to cover the intended expenses. Although not required, sound business practice suggests that employers develop a written reimbursement policy.
Disaster relief payments allow employers to provide at least a small amount of tax-free money to their employees to help in this difficult time. Those wishing to provide this benefit will need to use this benefit relatively soon, as once the national emergency is deemed to be over, any such payments will no longer be tax free.
Contact Phil Baptiste at firstname.lastname@example.org or a member of your service team to discuss this topic further.
Cohen & Company is not rendering legal, accounting or other professional advice. Information contained in this post is considered accurate as of the date of publishing. Any action taken based on information in this blog should be taken only after a detailed review of the specific facts, circumstances and current law.