In the midst of the ongoing coronavirus crisis, many employers are looking for ways to offer employees (and furloughed employees) financial assistance to help them pay expenses while they are not earning regular wages. Internal Revenue Code (Code) Section 139, which allows “qualified disaster relief payments” to be excluded from income, may offer an opportunity for employers to offer such financial assistance to employees and allow employees to receive the amounts without federal income tax.

Generally, all payments by employers to (or for the benefit of) employees are treated as taxable compensation for the performance of services. Moreover, under the Code, employer payments to employees cannot be treated as non-taxable gifts.

However, Code Section 139 (which was enacted in the aftermath of the September 11, 2001 terrorist attacks) provides that any payment or reimbursement made in connection with a qualified disaster for reasonable and necessary personal, family, living, or funeral expenses may be excluded from the employee’s income. President Trump declared the coronavirus crisis a national emergency on March 13, 2020. As a result, Code Section 139 may apply to payments made by employers after that date to the extent that such payments are not wages (i.e., are not compensation for services performed) but instead are intended to relieve employees from the burden of qualifying expenditures. Payments to cover losses that are reimbursed by insurance or otherwise also do not qualify.

However, even with those restrictions, Code Section 139 offers opportunities for employers to establish disaster relief funds for employees that are designed to pay or to reimburse employees for a variety of anticipated costs, including housing and food costs, unreimbursed medical expenses, and health-related expenses; childcare expenses; increased expenses related to telecommuting; and other critical living expenses.

Although the guidance addressing Code Section 139 is sparse, the IRS has made clear in the wake of other emergencies that strict substantiation from employees who receive money is not required; an employer can make relief payments to employees without a cap as long as such payments do not exceed an amount reasonably expected to be commensurate with the expenses incurred.

Ballard Spahr can assist employers in developing plans designed to provide employees with tax-exempt disaster relief payments and with other tax issues related to the ongoing crisis. For questions about Code Section 139 or other tax issues, please contact a member of Ballard Spahr's Tax Group.


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