Employer Deduction for Employee Disaster Relief Payments

Under IRC §139 of the Internal Revenue Code, employers are allowed to make “qualified disaster relief payments” to employees to assist them in times of crisis and fully deduct these payments. Qualified disaster relief payments are not taxable to the employee nor are they subject to employee tax withholding obligations.

Qualified payments are generally defined as any amount paid to or for the benefit of an individual to reimburse or pay reasonable and necessary personal, family, living or funeral expenses incurred as a result of a “qualified disaster” (within the meaning of IRC §65(i)(5)(A)), provided that such expense is not covered by insurance or otherwise compensated or reimbursable.

While IRC §139 does not impose limits on qualified disaster payments that employers may make to employees (either individually or in the aggregate), certain types of payments are excluded. IRC §139 does not apply to employee expenses compensated by insurance or to payments that are intended to replace lost income (i.e. payments of sick pay or family medical leave are taxable to the employee).

IRC §139 does not require that employees achieve a certain period of service to eligible to benefits.

Although IRC §139 does not require employers to adopt a written plan or policy to make qualified disaster payments, employers who desire to make qualified disaster payments on account of COVID-19 should consider, as a best practice, establishing a written plan or policy that would communicate, at minimum, the following information to employees:

  • the dates the plan commences and ends
  • who is eligible for such payments;
  • what expenses will be reimbursed or paid and whether there are limits on the amount of reimbursements or payments;
  • whether employees must provide receipts or other proof of their expenses to the employer to be eligible for payments; and
  • how and at what time payments are made.

IRC §139 does not require receipts or other proof of expenses incurred by employees. The IRS previously issued guidance clarifying that individuals are not required to account for actual expenses to qualify for the IRC §139 exclusion, provided that the amount of payments can be reasonably expected to be commensurate with the expenses incurred.

Although the IRS has not issued guidance with respect to the types of expenses that may qualify under IRC §139 during the Coronavirus pandemic, the following are examples:

  • Unreimbursed COVID-19 and other medical expenses that are not compensated for by insurance.
  • Over-the-counter medications and hand sanitizer.
  • Work-from-home expenses (e.g., costs to create home office, such as purchasing a printer or home phone; increased utility costs on account of the home office; cost of new or expanded internet access);
  • Dependent care expenses (e.g., increased childcare or tutoring costs due to school closings; remote learning or homeschooling expenses, such as home internet, computer for use by a dependent, educational materials, subscriptions to online educational resources, etc.);
  • Increased transportation expenses (e.g., increased commuting costs from lack of access to public transportation);
  • Funeral expenses (e.g., expenses attributed to the funeral of an employee, his or her spouse or dependent, who dies from a COVID-19 infection); and
  • Other living expenses on account of an employee’s known exposure to COVID-19 (e.g., cleaning products to sanitize home, etc.).