Need to help out employees as they deal with the repercussions of the virus and “stay at home” orders?
Section 139 allows employers to make “qualified disaster relief payments” to employees to assist the employees in managing the COVID-19 pandemic. These are fully deductible payments for the employer, while being tax-free to the employee.
Section 139 was added to the Code after September 11, 2001. The Section 139 relief payments apply to any “federally declared disaster”. On March 13, 2020, President Trump declared a national emergency in connection with COVID-19 that triggers the tax-free provisions allowed in Section 139.
Employers are able to immediately provide these tax-free payments to employees as long as these payments are to reimburse or pay the employee for “reasonable and necessary personal, family, living, or funeral expenses” incurred.
Since Section 139 was created in 2001, it has not yet been used for a national pandemic. Based on the language provided, it would seem reasonable that the following expenses are covered:
- Medical expenses not covered by insurance: deductibles, out-of-pocket expenses
- Over-the counter medications, hand sanitizer
- Funeral costs of an employee or member of an employee’s family
- Employee expenses for equipment and supplies needed to work from home: cell phone, computer, printer, office supplies, and increased utilities
What Does NOT Qualify?
Payments that are not covered by Section 139, and fully taxable to the employee include:
- Payments to employees for expenses that would have been paid for by insurance or that are intended to replace income.
- Sick pay
- Family medical leave
- Any payments pursuant to a legal or contractual obligation to pay severance would be difficult to re-characterize as Section 139 payments
Recordkeeping Advice for Section 139
Unlike other areas of the code, there is not a requirement for formal plan documentation. Also, there is no minimum period of service for the employee to be eligible. However, we recommend these steps be taken:
- Document the plan in a memo and include specific reimbursement details including:
- A start date and end date for which these expenses are allowed to be reimbursed
- A general list of expenses the taxpayer intends to reimburse employees
- Any limitations of total expenses to one employee, or for the entire “program”
- Create a new general ledger expense account to track these Section 139 payments
Businesses that are thinking about severance payments for their employees, may consider structuring these payments so that they might qualify under Section 139. Section 139 payments are determined by the expenses they are intended to offset, while severance payments often are computed based on years of service and existing pay. In spite of those considerations, if taxpayers can work through these considerations, then Section 139 may result in larger after-tax benefits to recipients.
Please contact your Wegner CPAs professional if you have follow up questions.