Employers May Be Able to Provide COVID-19 Qualified Disaster Relief Payments to Employees Tax-Free
Right now, and in periods of financial hardship, many employers are looking for ways to help out their employees, and a little-known provision of the Internal Revenue Code Section is making this possible in a way that affords tax benefits to both employee and employer. Section 139 may be utilized by employers to provide tax-free payments and/or reimbursements to employees in the form of “qualified disaster relief payments” (QDRP). Now that President Trump has declared COVID-19 a national emergency, payments providing relief from the pandemic will be QDRP under Section 139.
What is Covered by Qualified Disaster Relief Payments?
QDRP is any amount paid to an employee “to reimburse or pay reasonable and necessary personal, family, living, or funeral expenses incurred as a result of a qualified disaster,” but only to the extent that the expense isn’t covered by insurance or otherwise. QDRP do not include payments for lost wages or unemployment compensation. These payments should not be intended to indemnify all losses or to reimburse an employee for the cost of nonessential, luxury or decorative items and services. In the context of COVID-19, it appears that employers could pay for, reimburse or provide employees with tax-free payments for over-the-counter medications, hand sanitizers, home disinfectant supplies, medical expenses, childcare or tutoring expenses due to school closings, transportation expenses and increased home expenses due to working from home, including increased utility expenses or purchasing a home monitor and networking equipment, mortgage or rent expenses, etc.
QDRP amounts are excluded from the employees’ gross income and are not treated as net earnings from self-employment, wages or compensation subject to tax. QDRP are also fully deductible by the employer. In addition to these tax benefits, there is no federal reporting or disclosures required when making these payments in that these payments are not reported on Form W-2 or 1099 and are not subject to federal income or payroll tax withholding. Furthermore, these payments are not considered gifts for gift tax reporting either. Likewise, for state income tax purposes, states typically follow the Federal treatment of QDRP and therefore would be excluded from the definition of wages for state income tax withholding purposes. QDRP may still be considered wages for purposes of state unemployment insurance tax. More importantly, there is no limit on the amount or frequency of QDRP that an employer can make to any individual employee or to all employees in the aggregate and employees are not required to provide receipts or other substantiation supporting their expenses for which they receive payments for, provided the payments and amounts are reasonably expected to be commensurate with the expenses incurred.
Recommendations for Developing a QDRP Program
Employers are not required to have a written program for QDRP, but having such a program is recommended, so employers can inform employees about the parameters of the employer’s program in the context of the COVID-19 disaster. Employers should weigh the cost of such a program against the needs of its employees in drafting or developing their policies. Factors to be considered may include but aren’t limited to (1) Which employees are covered; (2) What expenses are covered; (3) Any limits to reimbursements, including amounts and types of expenses and (4) Documentation of expenses requirements.
Contact your Marks Paneth tax advisor to discuss whether a qualified disaster relief payment program is the right choice for your business during these unprecedented times. For more information on business and tax issues related to the COVID-19 crisis, visit Marks Paneth’s Pandemic Resource Center.