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Section 139: Tax-Exempt Payments Or Reimbursements to Employees

Section 139: Tax-Exempt Payments Or Reimbursements to Employees

On March 13, 2020, the President declared a national emergency due to the novel coronavirus (COVID-19) pandemic. As a result, the COVID-19 pandemic has been designated a federal disaster under the Robert T. Stafford Disaster Relief and Emergency Assistance Act.


Under Section 139, employers may directly reimburse or pay for reasonable and necessary personal, family, living, or funeral expenses incurred as a result of eligible expenses incurred by the employee due to COVID-19 calamities that are not reimbursed by insurance. The Internal Revenue Service did not provide information on what constitutes "reasonable and necessary" expenses related to COVID-19; however, these fees may include:

  • Accommodation if the employee or a family member must stay away from home to avoid a family member diagnosed with COVID-19

  • Caregiver expenses

  • Commuting costs

  • Expenses incurred to enable the employee to work from home (for example, costs of setting up a home office and increased charges)

  • Expenses related to childcare or tutoring

  • Funeral expenses

  • Legal and accounting fees

  • Uninsured medical expenses (for example, over-the-counter medications and cleaning supplies)

Payments that are not eligible for Section 139 relief include the following:

  • Expenses compensated by the insurance

  • Non-essential, decorative, or luxury items or services

  • Salary replacement (e.g., sick leave or other paid leave)

There is no limit on the dollar amount or frequency of eligible emergency payments. However, payments must be reasonably commensurate with the amount of reasonable and necessary unreimbursed expenses related to COVID-19. Employers can assist any individual employee or all employees without discriminatory restrictions.


Under Section 139, there are no substantive or administrative requirements for the employee or employer. Although the I.R.S. does not guide how to administer a Section 139 program, employers are encouraged to adopt a written policy that specifies the following:

  • Administrative process and restrictions

  • Amount of expenses to be paid or reimbursed on behalf of employees with a maximum amount defined per employee

  • How and when will payments be made

  • Start and end date of the program

  • The employees eligible under the plan

  • Types of expenses that will be reimbursed or paid on behalf of employees

Are qualifying wages excluded from gross income as "qualified disaster payments"?

No. Section 139 of the I.R.C. (Internal Revenue Code) excludes certain payments to individuals from a taxpayer's gross income for reimbursement or payment of qualified disaster expenses ("qualified disaster relief payments"). Although the COVID-19 pandemic is a "qualified disaster" within the meaning of Code Section 139, qualifying wages are not eligible for excluded emergency relief payments, as qualifying wages are what a person would otherwise earn as compensation instead of payments to cancel any expenses a person would incur due to COVID-19.

Section 139(c)(2) of the Code provides that, for the purposes of Section 139 of the Code, the term "qualified disaster" includes a disaster determined by the President to justify federal government assistance under the Robert T. and Emergency Assistance Act, 42 U.S.C. 5121 - 5207. The President made a disaster determination for all 50 states, the District of Columbia, and all U.S. territories. Section 139(b) of the Code defines a "qualified relief payment" as including any amount paid to or on behalf of a person to reimburse or pay for reasonable and necessary personal, family, subsistence, or funeral expenses incurred as a result of a qualified disaster. Qualified disaster payments do not include eligible wages paid by an employer, including those paid when an employee does not provide services


Tax implications: tax-free and fully deductible

Qualified emergency payments are non-taxable for the employee and fully deductible for the employer. Also, payments are not subject to federal income tax or withholding, and there are no federal disclosure or reporting requirements. Although many states follow the federal treatment of qualified emergency payments, employers should determine their income tax or payroll tax withholding with their tax advisor.



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