Year-End Planning: Qualified Disaster Relief Under Section 139

Qualified Disaster Relief Under Section 139

By George Batas

As such an unprecedented year draws to a close, employers and employees alike may be interested to know that Section 139 of the Internal Revenue Code allows an employer to make qualified disaster relief payments to an individual on a tax-free basis. The employer would get a deduction for the payments and the individual would receive the money tax-free.

To qualify under Section 139, a two-prong test must be met. First, a “qualified” disaster must have occurred. Based on the Emergency Declaration, the pandemic has met this test. The second test is that payments must be considered “qualified” disaster relief payments. Qualified disaster relief payments are meant to include any amount to reimburse or pay reasonable and necessary personal, family, living, or funeral expenses because of a qualified disaster. Some expenses that could fall into this category include costs associated with establishing a home office, medical expenses related to COVID-19 and not covered by insurance, dependent care expenses incurred due to closure of existing care providers, costs associated with alternative forms of commuting due to mass transit being unavailable or unsafe, and costs to purchase PPE . The payments from Section 139 are not allowed to be a replacement of wages to an employee.

Although there is no specific requirement for employers to adopt a written plan or policy to make qualified disaster payments, it is recommended that the employer put together a plan that would communicate who is eligible for the payments, what expenses would be covered, whether the employee must provide receipts or other proof of payments, and how and when the payments are to be made. The IRS has specifically stated employees are not required to account for actual expenses to qualify for the Section 139 exclusion as long as the amount of payments can be “reasonably expected to be commensurate with the expenses incurred.” It is highly recommended that the employer have signed statements from employees affirming that their claims arise from an area covered by the disaster declaration, that they have incurred qualified expenses, and that their expenses will not be covered through an insurance policy.

If you have questions regarding Section 139 qualification, please contact us.