Not well publicized is a tax provision under Internal Revenue Code Section 139 that permits employers to make non-taxable relief payments to employees for reasonable and necessary personal, family, living, or funeral expenses incurred as a result of a qualified disaster. COVID-19 became a qualified disaster when President Donald Trump declared a national emergency on March 13, 2020. Such expenses are generally deductible by the employer unless paid to the owner(s). The most likely payments covered relate to individuals impacted by the quarantine or disease but they could extend to costs of setting up or maintaining a home office for employees working remotely. A payment akin to income replacement (i.e., lost wages) is not an eligible expense.
Section 139 offers the following added benefits:
- There is no dollar limit.
- There is no requirement for expenses to be substantiated but the employer needs to have an expectation that payment is commensurate with reasonable expenses to be incurred.
- There is no discrimination testing.
- There is no written plan required. Despite that, a best practice might be to develop a form that requires sign off by the impacted employee(s) that the payments relate to expenses associated with COVID-19 and are not reimbursable by insurance.
At a time when there is a lot of uncertainty and anxiety, it is good to see that common sense laws are in place to help those in need. Section 139 is one of such laws.