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 Actauthorizes 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.
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."
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.
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.
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