Get To Know Section 139

Get To Know Section 139

The Coronavirus pandemic caused changes in the everyday life of everyone. Since employees are directly impacted, employers may be looking to find a silver lining to assist them. In the wake of the September 11, 2001 attacks, the Internal Revenue Code (IRC) was amended providing employers a way to make tax free "qualified disaster relief" payments to assist employees as a result of a national disaster. Federal income exclusion for payments received related to a "qualified disaster" was established by Section 139. 

The disaster must be a qualified federal disaster for Section 139 to apply. Under the Robert Stafford Disaster Relief and Emergency Assistance Act, President Trump has declared COVID-19 a national disaster. For other tax purposes, Section 139 classifies the COVID-19 pandemic as a qualified federal disaster as interpreted by the IRS. Employers are allowed to provide qualified disaster relief payments to help employees. These payments are tax-free to employees and fully deductible to employers. It means that employees can get cash from their employers to help them through a disaster and they are not required to pay an income tax on that cash. For employment taxes, these payments are not included from gross income and wages and compensation. These will be free from federal tax withholding and are not required to be reported on Form W-2 of Form 1099. Employers should consult with their tax advisor even if the exclusion may apply to state taxes and state tax withholding as well.

The Internal Revenue Code Section 139 can exclude the qualified disaster relief payments received by an employee from gross income.

What is the requirement to be considered as "qualified"?

The amount paid by an employer must be a "qualified disaster relief payment" to be excludable from income. This covers the money paid to or for the benefit of an individual as reimbursement or pays reasonable and necessary:

  • Personal, family, living, or funeral expenses incurred as an outcome of a qualified disaster; or

  • Expenses made to repair or rehabilitate a personal residence, or repair or replace its contents, to the extent that the need for such repair, rehabilitation, or replacement is attributable to a qualified disaster.

All expenses related to property damage such as temporary housing, food, and property replacement would be covered in a situation like the previous disasters Hurricane Katrina and Sandy. But since COVID-19 is different as it is the first declared disease pandemic, employers are given a little guidance to determine what qualifies as a "personal, family, or living" expenses incurred as a result of COVID-19.

Employers may consider reimbursing or paying employees for "reasonable and necessary expenses" based on the COVID-19 pandemic such as:

  • Expenses related to medical but not covered by insurance (e.g., the copay for COVID-19 related expenses)

  • Expenses related to health (e.g., face masks, sanitizing cleaning products, hand sanitizer)

  • Expenses related to dependent care due to school/place of care closings

  • Expenses related to tutoring and home-schooling (e.g., the Internet, computers to aid education, online education applications)

  • Expenses related to working from home (e.g., internet, printer, home office set-up, cell phone costs)

  • Incremental utility costs due to working from home

  • Expenses related to transportation as a result of the terminations of public transportation and/or work relocation

  • Expenses related to critical care or funeral of an employee or their family due to COVID-19

  • Counseling

  • Temporary housing

  • Non-perishable foods for reserve

  • Expenses additional to travel and food for a returning student

What is not included?

  • Items that are covered by insurance or other sources

  • Items and services that are considered non-essential, luxury, and decorative (e.g., Cable and Netflix subscription)

  • Lost income reimbursements or compensation (e.g., wages, sick pay, family medical leave pay, etc.)

Setting up a plan

Plans under Section 139 are not covered by the Employee Retirement Income Security Act (ERISA), and establishing a written formal plan by an employer is not required by the IRS's guidance. However, it is recommended to document a formal plan. The situation where an employee did have a written program and the IRS favorably concluded the payments would meet the criteria for income tax exclusion is described under the IRS ruling. Hence, a formal plan document will help inform employees as to the details of the employer system of reimbursement which is considered the best practice. Some key features included in designing and drafting the plan are:

  • Eligibility description for employees (e.g., classes or group)

  • Appropriate eligibility parameters should be created, although there is no formal non-discriminatory testing.

  • Certain benefits are not allowed if considered "double benefits" if owners will participate

List of expenses that will be reimbursed:

  • "Reasonable and necessary"

  • Presumed reasonable expenses per employee limitations

Even there is no established cap on the amount of assistance that may be given, employers can set a cap on the total amount of reimbursement

Method of payment

  • Reimbursement or vendor direct 

  • Expense functions at the start and end of the program

  • Administrator, or internal committee, and administrator's powers such as making any discretionary decisions

Method on how employees will submit

  • A document stating that the program is concerning the COVID-19 Outbreak Stafford declaration

  • Expense documentations

It is little or not required to have recordkeeping or substantiation in complying IRC Section 139. But, an employer is still expected to keep adequate records to document its deduction for the payments. Moreover, it will avoid potential abuse to entail collecting receipts (if available), or written confirmation that an employee incurred qualified expenses.



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