COVID-19: Section 139 Employer-Provided Tax-Free Disaster Relief Benefits
COVID-19: Section 139 Employer-Provided Tax-Free Disaster Relief BenefitsMay 11, 2020
An attractive option for employers looking to ensure their employees remain healthy and secure at this time, IRS Section 139 plans provide employers with a tax-advantaged way of paying employees for qualified emergency expenses during a disaster, such as the COVID-19 pandemic.
Qualified Disaster Relief Payments
Section 139 qualified payments to employees are for “reasonable and necessary personal, family, living or funeral expenses incurred as a result of a qualified disaster,” like the COVID-19 pandemic.
There’s no official list of the specific expense items that are considered to be “reasonable and necessary,” but it’s generally accepted that the following items are included:
- Hand sanitizer, face masks, and sanitizing cleaning products.
- Dependent care costs due to school closings.
- Working from home expenses (e.g. home office set-up, increased utilities, cell phone, and internet costs).
- Increased commuting costs, such as taxis instead of public transit.
- Unreimbursed health-related expenses.
Payments that do not qualify include items such as lost income, non-essential items, luxury items, decorative items, and services like Netflix, or other items covered elsewhere, e.g. by insurance.
Qualified payments made through a Section 139 plan are tax-free to employees and fully deductible to employers. These payments are excluded from gross income and wages and compensation for purposes of employment taxes. They are not subject to federal tax withholding and do not need to be reported on Form W-2 of Form 1099. The exclusion may apply to state taxes and state tax withholding as well, but employers should consult with their tax advisor.
Unlike other similar plans, there are no limits on the dollar amount or frequency of qualified payments. Also, employees are not required to provide receipts or other proof of expenses. (Tax experts recommend that employers implement the usual controls – see the next section.)
How to Set Up a Section 139 Plan
Section 139 plans are not subject to ERISA, so they don’t have the same documentation requirements as similar tax-advantaged accounts such as HRAs or HSAs. Tax experts, however, advise that employers implement a plan document that addresses the typical controls: the class of eligible employees, a listing of the type of expenses covered, expense limits or caps, payment procedures, etc.
- Emergency Aid Due To The Coronavirus Pandemic Is Tax-Free, Forbes
- Employers Can Make ‘Disaster Payments’ to Coronavirus-Affected Employees, SHRM
- COVID-19 Disaster Relief Payments Under Section 139, Orrick
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