Special Tax Deduction for Employer Disaster Relief Payments to Employees

The coronavirus (COVID-19) pandemic has officially been declared a national emergency by the federal government. This has lots of implications, one of them is that employers may reimburse their employees for many expenses arising from the pandemic. Such reimbursement is tax-free to the employee and deductible by the employer. Employers are not required to make such payments; they are purely optional.

Qualified Disaster Relief Payments

The Robert T. Stafford Disaster Relief and Emergency Assistance Act authorizes the President to declare a national emergency when a disaster occurs that overwhelms the ability of state or local governments to respond. President Trump did just that on March 13 when he declared the coronavirus (COVID-19) pandemic to be a national emergency.

Section 139 of the tax code goes into effect when the President makes such a declaration. Enacted after the 9/11 terrorist attacks in 2001, it's intended to encourage employers to provide financial help to their employees during times of crisis, with few paperwork requirements.

Specifically, employers are now allowed to reimburse or pay employees for reasonable and necessary personal, family, living, or funeral expenses they incur due to the pandemic emergency. (IRC Sec. 139(b)(2).). Such qualified disaster relief payments may include, but are not limited to:

• uninsured and unreimbursed medical expenses, including co-pays, deductibles, prescriptions, and over-the-counter medications
• health expenses that are not medical expenses such as hand sanitizer, home disinfectant supplies, vitamins, and supplements
• increased expenses due to being quarantined at home--for example, increased utility expenses
• expenses for setting up or maintaining a home office--for example, faster internet connections, computers, monitors, laptops, printers, office supplies
• housing for additional family members
• nonperishable food purchases
• increased childcare expenses, including tutoring due to school closings
• increased commuting costs--for example, taking a taxi or Uber to work instead of public mass transit, and
• funeral expenses for family members arising from the pandemic.

However, employers can't make tax-free wage replacement payments to employees--for example, paid sick leave or other leave, or payment for lost wages. Also not included are expenses covered by insurance.

The payments can be made to full or part-time employees, and the employees need not have been employed for any specified minimum period of time.

There is no dollar limit on such payments. The only limit is that they be necessary and reasonable. Employers can establish a maximum amount each employer will be paid or how much will be paid in the aggregate; but this is optional.

Moreover, unlike most employee fringe benefits, qualified disaster payments are not subject to anti-discrimination rules. This means an employer can make such payments to some employees and not others.

No Substantiation Needed

This provision of the tax law only comes into effect during times of emergency, so it dispenses with normal recordkeeping and substantiation requirements. Employees are not required to substantiate their actual expenses, provided the payments can be reasonably expected to be commensurate with the expenses incurred. Employers are not required to have a formal written reimbursement plan or other documentation. Nevertheless, it's always wise for employers to keep records. At a minimum, employers should keep records of the amount paid and to whom.

Tax Free and Fully Deductible

Qualified disaster relief payments are completely tax free to the employee. They are not taxable wages or included in gross income. They should not be included as wages in an employee's W-2 form. Nor need they be reported to the IRS on Form 1099-MISC. The employer may deduct the payments as an employee benefit program.