Tax-Free Employee Assistance

We are living in the midst of an unprecedented health and financial crisis as the country tries to navigate unchartered waters along with the uncertainty for what lies ahead.  Fortunately, there is a little known and little used Internal Revenue Code section that was enacted in 2002 in response to the September 11th attacks of 2001 which allows employers to provide tax-free assistance to employees.  Under Section 139, “qualified disaster relief payments” are not only tax-free to the employee, but also tax deductible to the employer.

COVID-19 and Section 139

On March 13th, President Trump declared a national emergency under the Stafford Act in response to the COVID-19 pandemic sweeping across the nation.  Additionally, Notice 2020-17 published on March 18th, cited the Federally declared disaster to give the Secretary of the Treasury authority to postpone the timely payment of taxes due on April 15th  to July 15th.

Qualified Disaster Relief Payments

Qualified disaster relief payments are payments from employers to reimburse or pay employees for reasonable and necessary personal, family, living or funeral expenses incurred as a result of a qualified disaster which, in this case, is COVID-19.  In response to the pandemic, employees are being asked to work from home due to government mandates or employer policies and they may not be adequately equipped without coming out of pocket to purchase computers, scanners, additional monitors or other office supplies.

Paid time off including vacation, sick pay or family medical leave are not covered, nor is lost pay or expenses that are otherwise compensated for by insurance.

Written Plans and Record Keeping

Section 139 does not require employers to have written policies nor does it require formal record keeping typically required for reimbursed expenses.  Revenue Ruling 2003-12 recognizes that given the “extraordinary circumstances surrounding a qualified disaster, it is anticipated that individuals will not be required to account for actual expenses in order to qualify the Section 139 exclusion, provided that the amount of the payments can be reasonably expected to be commensurate with the expenses incurred.”  Despite the informality, it is always good practice for employers to develop a written plan to document who is covered, amounts paid, de minimis amounts not requiring a receipt or proof or expense, a general listing of expenses the employer will reimburse and any maximum amount allowed per employee.

Additional Questions?

ARM CPA’s tax professionals are here to help during the quickly evolving environment challenging nearly every business and its employees to quickly adapt.   Let us worry about the taxes while you are focused on leading your company to more stable ground.  Contact us a 614-486-3600 to initiate a conversation.