When President Donald Trump
declared COVID-19 to be a national emergency on March 13, it opened the door for employers to provide tax-favored financial assistance to employees directly or indirectly affected by the coronavirus pandemic.
The Robert T. Stafford Disaster Relief and Emergency Assistance Act authorizes the president to declare a national emergency when faced with a disaster that overwhelms the response capability of state or local governments. Such a declaration allows employers to provide tax-free payments or reimbursements to affected employees as "qualified disaster payments" under Section 139 of the Internal Revenue Code.
According to tax and advisory firm BDO, it appears that, in response to the COVID-19 pandemic,
employers can provide employees with tax-free payments for expenses such as:
- Over-the-counter medications, hand sanitizer and home disinfectant supplies.
- Child care or tutoring due to school closings.
- Work-from-home expenses such as setting up a home office, increased utilities expenses and higher Internet costs.
- Increased commuting costs, such as taking a taxi instead of using public mass transit.
- Unreimbursed health-related expenses.
The payments, however, should not include nonessential products or services.
Wage Replacement Excluded
Wage replacement (such as paid sick or other leave) would
not be covered by Section 139, so such payments would still be taxable wages and would remain subject to income- and payroll-tax withholding and reporting. Also not covered under Section 139 are
paid sick leave and payments or expenses that are compensated by insurance or other sources, noted Lori A. Basilico, a partner in the Providence, R.I., office of law firm Locke Lord LLP.
Tax-Free and Fully Deductible
"The coronavirus pandemic is now the type of disaster for which
an employer may reimburse employees for disaster-related expenses on a tax-free basis, free from Form W-2 or Form 1099 reporting," wrote David Rogers and Ruth Wimer, partners in the Washington, D.C., office of law firm Winston.
Making these payments in accordance with Section 139 "on a tax-free basis to employees and on a deductible basis for the employer, along with decreased administrative burdens, creates a silver lining to this novel disaster situation," Rogers and Wimer noted.
Generally, state treatment for income-tax withholding purposes will mirror the federal treatment of qualified disaster relief payments.
Section 139 does not impose any limit on the amount or frequency of qualified disaster payments that an employer can make to any individual employee or to all employees. Employees are not required to provide receipts or other proof supporting their expenses. However, "employers could require such proof as part of its written program, perhaps using rules similar to the long-standing IRS 'accountable plan' rules," BDO stated.
Basilico explained that "under Internal Revenue Service guidance (Revenue Ruling 2003-12), because of the extraordinary circumstances surrounding a qualified disaster, individuals will not be required to account for actual expenses in order to qualify for the Code Section 139 income exclusion, provided that the amount of the payments can be reasonably expected to be commensurate with the expenses incurred."
[SHRM members-only HR Q&A:
What is a tax-advantaged employee crisis fund, and what are the guidelines for establishing such a fund?]
Written Program Can Be Helpful
Although there is no requirement for the employer to have a written qualified disaster relief payment plan, "employers should consider establishing procedures to inform employees of the reimbursement process and for collecting and reviewing requests for relief," Basilico said.
Rogers and Wimer favor adopting a written plan. Revenue Ruling 2003-12, they noted, "described a situation where the employer did have a written program and the IRS favorably concluded the payments would meet the criteria for income tax exclusion. Furthermore, the employer may wish to inform employees as to the details of the employer system of reimbursement," which could be accomplished through a written plan.
Rogers and Wimer suggested that employers:
- State that the program is related to the president's COVID-19 emergency declaration.
- Describe eligible employee classes or groups.
- List expenses that will be reimbursed, or provide a per-employee allowance for presumed reasonable expenses.
- Describe the method for reimbursement/payment.
- Provide any employer-imposed expense limit per employee (no limit applies per the statute).
- Name the administrator and the administrator's powers, such as discretionary decisions.
- Provide the start and end date of the program.
Good Program Governance
Although Section 139 programs are not subject to the Employee Retirement Income Security Act (ERISA), "it may be prudent for an employer to follow and apply ERISA principles in administrating its program as a good practice to ensure the program is applied uniformly," recommended Garrett Higgins, partner, and Eva Mruk, tax director, at accounting and advisory firm PKF O'Connor in Harrison, N.Y., and New York City, respectively.
They suggested forming a committee of three or more employees to make decisions as to whether an employee qualifies for assistance and the amount of the grant to each employee. "Because there is no specific cap on the amount of assistance that may be provided to an employee other than it must be 'reasonable and necessary' and must not be for an expense reimbursable by the employee's insurance, a committee can have full discretion in approving different grant amounts for each employee," Higgins and Mruk advised.
They also recommended that employees complete a basic application form indicating the amount of assistance being requested as well as affirming that the request does not exceed the amount of the employee's unreimbursed "reasonable and necessary" expenses and that the grant will be used solely for expenses that qualify under the program.
Related SHRM Articles:
Emergency Relief Funds Throw Employees a Lifeline During Pandemic,
SHRM Online, April 2020
Using Leave-Sharing Plans During the COVID-19 Pandemic,
SHRM Online, March 2020