To help with employees’ financial wellness while the nation experiences repercussions from the outbreak of the coronavirus that causes COVID-19, employers may want to consider implementing a qualified disaster relief payment program under Internal Revenue Code Section 139.
An alert from law firm DuaneMorris says that as a result of COVID-19 being designated a disaster under the Robert T. Stafford Disaster Relief and Emergency Assistance Act, employers are permitted to make tax-free reimbursements and payments to employees under Internal Revenue Code Section 139. “There are many potential categories of expenses that could be triggered in the COVID-19 context and reimbursed under Code Section 139―including, but not limited to, medical expenses, child care expenses due to school closures and increased home expenses (including increased utility expenses). The only limitation under Code Section 139 is that such expenses related to COVID-19 must be ‘reasonable and necessary,’” the alert says.
The law firm warns that wage replacement is never permissible and is always treated as a taxable wage. Therefore, Code Section 139 cannot be used as a wage replacement alternative. Qualified disaster relief payments are generally deductible by the employer, are not subject to any federal withholding obligations and do not need to be reported on a Form W-2.
Code Section 139 does not require a written plan document, but the law firm recommends that employers adopt one. The alert says the IRS previously approved a written program in Revenue Ruling 2003-12, so it is viewed as a best practice to have a written program to support the favorable tax treatment under Code Section 139. And employees should be informed of the availability and parameters of such a program.
“Any policy or program adopted by an employer must outline the features of the program, including limiting payments to those that are ‘reasonable and necessary’ in the context of the COVID-19 outbreak, describing the eligible employee class or group and listing expenses that will be subject to reimbursement or payment,” the alert says.
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