It’s an Employee Disaster Out There! Section 139 Can Help: Part 2

A great strategy for employers looking to assist employees is to institute a Section 139 plan. These plans can be optimal in circumstances where a large-scale disaster such as a hurricane or the coronavirus (COVID-19) pandemic. They leverage favorable tax treatment to provide aid in times of need for employees.

Assessing the Need

Employers have to design, implement, and administer the plans. As discussed above, the structure of 139 plans already optimize tax- efficiency. That optimization does not help an employer when it comes to the practical concerns of putting a 139 plan in action.

As an initial matter, the employer should determine if a Section 139 plan will meet their needs. An employer may want employees to contribute to the plan or could want to assist employees suffering from hardships more generally, such as a employees with unexpected medical or funeral expenses. In those cases, an employee relief fund may be a better option.

On the other hand, if the employer simply wants to assist employees at its discretion, perhaps simply making taxable bonus payments is a better option. The taxable bonus plan allows employers to pay any employee they would like, but the payments are taxable compensation for the recipients. This avoids the major limitation with Section 139 plans and employee relief funds – funds cannot be earmarked for specific employees. Of course, it is not as efficient from a tax perspective.

If a Section 139 plan is right for the employer after considering the alternatives, then the next step is to design the plan. The employer should evaluate:

1. Employee needs,
2. Funding needs,
3. Payment process,
4. Information needed, and
5. Records to be kept.

These are vital questions that determine needs to be met, available grant dollars, and how those needs can be addressed in an effective, compliant way.

Making a Plan

Once these items have been addressed, the guidelines and process should be documented formally, and then the program can be implemented. There is no requirement that a formal procedure or plan be implemented, but it is helpful for many reasons. First, a written plan makes sure the program is administered consistently. Similarly, it ensures fairness for employees seeking grant payments. Finally, it is helpful for audit purposes and for future implementations of the program.

First, the employer should assess what their employees are struggling with. If a business is considering a 139 plan to begin with, it is likely they have some idea of how the qualified disaster is impacting employees. A good next step could be an informal survey of management, supervisors, human resources, and other employees. This casts a proverbial broad net and gets valuable feedback which the plan designers might not otherwise see. Employers should remember that employee needs do not have to be precisely determined – a reasonable estimate of expenses will suffice. Additionally, the time of employment and position with the company should not be qualifying factors.

Following that assessment, the designers of the plan should examine how they can meet the needs of impacted employees. A straightforward way to do this would be estimating the total cost to help every effected employee, and then evaluating what money is actually available for that purpose. If at all possible, the administrative expense of the plan should be estimated as well. A conservative estimate is best.

While the 139 plan can be deducted as a business expense, it is nonetheless an expense and should be accounted for appropriately. An important decision to make is whether every qualifying employee should get the same amount, regardless of need. It is far simpler to award a flat amount to each qualifying employee. If employees receive different, need-based amounts, that will have to be documented appropriately.

The Details of Payments

Once the company has determined – or roughly estimated – the numbers, the natural next step is to figure out how to get the payments into the hands of employees in need. In all likelihood, direct deposit, echecks or perhaps prepaid debit cards are the best options. Direct deposit or ACH may be appealing since the system is presumably in place already, and it could simply be a matter of issuing additional payments to qualifying employees. Echecks are becoming a more prevalent method of payment due to the speed and accessibility. Prepaid debit cards can also be a helpful option, since after the cards have been obtained, they can be issued on the spot. Cash and physical checks are not ideal. Cash is difficult to administer and track in large amounts, and checks may be difficult to deliver timely especially in situations where victims have evacuated. No option is perfect given the different needs of the recipient employees, so the administrators of the 139 plan should prepare to work with employees who are having trouble getting their grant.

Properly assessing which information is to be collected from employees is extremely important to a successful and compliant 139 plan. This information should establish qualification and a record of the grants. Thankfully, the IRS has given some guidance on the issue. The information should include

1. Grant recipient name
2. Verification of employment, typically through collecting the employee ID number
3. Verification of address
4. Verification that the employee is impacted
5. Verification of how the employee is impacted (if grants are based on employee needs)
6. Confirm that the employee’s expenses are not covered by insurance
7. The date the grant is made
8. The amount of the grant (if grants are based on employee needs)

Note that any verification need not be intensive. All of this information can typically be collected on a simple application form. It may be sufficient simply to have recipients confirm the information and represent that it is true, subject to standard employment repercussions for misrepresentation or knowing falsehoods. Remember that employees are not required to account for or show evidence of actual expenses incurred.

Finally, the 139 plan design teams should establish which records are to be kept and for how long. Clearly, all of the information collected when qualifying employees for grants should be retained. Additionally, records of the payments (including dates, amounts, and recipients) should be retained. The standards for qualifying should also be kept on the record – what the underlying disaster is, which employees are eligible to receive payments, and for what expenses.

With all of this record-keeping information in place, a formal procedure should be easy to develop. The procedure should incorporate all of these steps, along with broader details for the program, including what sorts of disasters qualify, who in the company is responsible for grant decisions, and who is responsible for payment. The

IRS allows employers to provide direct, tax-advantaged financial assistance to qualifying employees under Section 139. This Code Section was added following the events of 9/11, and extends to payments made by employers to employees suffering the effects of a qualifying disaster (typically a government designated label). These payments are tax deductible as business expenses, but are excluded from income for employees. However, employers may want to start a plan, but may not know how. We suggest evaluating the needs of employees, the assistance amount available, the method of payment, and the information to be collected for records on the program. All of these determinations should be folded into a formal procedure so that the program can be implemented easily in the future for other qualifying disasters.

Continue Reading: It’s a Disaster Out There-Section 139 Can Help: Part 1