Snell & Wilmer
Southwest Benefits Update

March 26, 2020

Tax-Favorable COVID-19 Pandemic Relief for Employees and Employers Covered by Section 139 Programs

By Amberlee Conley, Greg Gautam, and Marvin S. ("Bucky") Swift, Jr.

With life upended for many employees during the COVID-19 pandemic, we want to highlight one way for employers to offer potential tax-favorable financial relief: implementing a disaster relief program under Section 139 of the Internal Revenue Code (“Code”). Section 139 offers certain tax benefits on qualified disaster relief payments (or reimbursements) made to employees during qualified disasters.

Qualified disasters under Section 139 include federally declared disasters, which are disasters determined by the President to warrant federal assistance under the Robert T. Stafford Disaster Relief and Emergency Assistance Act (the “Stafford Act”). The COVID-19 pandemic became a qualified disaster on March 13, 2020, when President Trump declared the pandemic a nationwide emergency and increased federal support for the pandemic under the Stafford Act.

As a result, employers may make qualified disaster relief payments to their employees under Section 139 to reimburse or pay for their employees’ reasonable and necessary:

(1) personal, family, living or funeral expenses incurred as a result of the COVID-19 pandemic, and

(2) expenses incurred for the repair or rehabilitation of a personal residence or repair or replacement of its contents to the extent that the need for such repair, rehabilitation or replacement is attributable to the COVID-19 pandemic.

Importantly, Section 139 will not apply to payments or reimbursements that replace income (e.g., lost wage payments, unemployment compensation, etc.) or if the expense may be otherwise compensated through other sources, such as insurance proceeds.

Section 139 casts a seemingly wide net when it comes to the type of expenses that can be covered, although there is little guidance for employers to determine what qualifies a “personal, family or living” expense incurred as a result of COVID-19. Based on the COVID-19 pandemic, employers may consider reimbursing or paying employees for the following types of expenses: food, clothing, temporary housing, transportation costs due to work relocation, counseling, hand sanitizers, disinfectants, home office expenses due to office building closings, or perhaps even child care or tutoring expenses due to school closings. Interestingly, the statute does not impose a dollar limit on the amount of these payments.

Qualifying payments under a Code Section 139 plan are not includable in the taxable income of the recipient employees and are fully tax-deductible by the employer. Although Section 139 of the Code does not contain specific plan document requirements (including the requirement that an employer maintain a written plan document or application or certification process), we do recommend that employers at least consider adopting a formal written plan document. Of course the look and feel of that written document will vary by employer based on its particular circumstance and the impact COVID-19 is having on its business and its employees.



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