It’s an Employee Disaster Out There! Section 139 Could Help: Part 1

Natural disasters have been a seemingly constant news fixture in recent years, including massive wildfires in California and Australia, Midwestern flooding, and the devastating 2017 hurricane season. And now, of course, we are battling the coronavirus (COVID-19) globally. Thankfully, there have been high-profile charitable efforts to assist the victims of these events. What many may not realize is that the Internal Revenue Code has special provisions for tax-advantaged aid in certain circumstances.

Who Qualifies?

The Internal Revenue Service allows employers to assist employees experiencing the effects of certain disasters. This is allowed under Internal Revenue Code section 139. That code section was added following the September 11th attacks under the Victims of Terrorism Tax Relief Act of 2001. 

Under Section 139, employers can make tax deductible payments to impacted employees, which the recipients do not have to include in their taxable income.

Perhaps the core principle of U.S. tax law is that gross income includes all income from whatever source derived. That, of course, includes all income received by employees from their employers. But, Section 139 carves out an exception to this rule.

The key concept of Section 139 is that “qualified disaster relief payments” are not included in income, so those payments are not taxable for the recipients. What makes the code section even more appealing is that the payments are also deductible for employers, as if they were normal compensation. These payments also do not get included in earnings for employment tax purposes.

The definition of “qualified disaster relief payment” is also in the tax code, and is more complex. The payments are amounts paid to or for the benefit of individuals falling into a number of categories relating to, of course, qualified disasters, including:

1. Disaster resulting from terrorist or military action,
2. Federally declared disasters,
3. Disasters resulting from accidents involving common carriers,
4. Events determined by the Treasury Secretary to be catastrophic, or
5. Disasters which an appropriate government authority determines warrant governmental assistance.

Typically for Section 139, the category which is most relevant is federally declared disasters. It is not uncommon for well over one hundred declarations to be made in a single year. These encompass events like hurricanes, floods, and the coronavirus, but also can include smaller, but still locally devastating, disasters. For example, from 2017-2019, declared disasters ranged between 110-140 annually.

Getting Paid

Employees affected by these events are eligible for employer-provided payments under Section 139. However, the payments can only be made for certain purposes – it is not enough for employees to simply have been impacted by the disaster. A qualified disaster relief payment is an amount paid to (or for the benefit of) qualifying employees:

• “[T]o reimburse or pay reasonable and necessary personal, family, living, or funeral expenses incurred as a result of a qualified disaster,
• to reimburse or pay reasonable and necessary 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 a qualified disaster,
• by a person engaged in the furnishing or sale of transportation as a common carrier by reason of the death or personal physical injuries incurred as a result of a qualified disaster [.]”

These payments are permissible to the extent the expenses are not otherwise accounted for, whether by insurance or other means.

The key is that these payments can cover reasonable living or funeral expenses and repair to a home or its contents that are a result of the qualified disaster. A unique feature of the coronavirus pandemic compared to other, more common disasters is that it does not tend to displace affected employees. By comparison, hurricanes, wildfires, flooding, etc. all tend to involve emergency housing expenses.

A considerable advantage of Section 139 is that impacted individuals do not have to provide significant documentation or other proof of their expenses. In a publication from the Joint Committee on Taxation discussing the provision, congressional staff acknowledges that qualified disasters are special circumstances. As such, employees are not required to account for actual expenses they incur, so long as the amount of payments are reasonably likely to roughly align with those expenses.

Tax Free and Tax Deductible

The Joint Committee on Taxation’s comments also explicitly state that qualified disaster payments by employers are deductible, a guideline which is not made clear elsewhere. Specifically, they state that there was no intent to change existing law on the deductibility of qualified disaster relief payments made by employers. Clarifying further, they state “payments excludable from income under the provision are deductible to the same extent they would be if they were includable in income.” 

Additionally, the guidance stipulates that not only are the relief payments excluded from income for income tax purposes, they are also excluded for employment tax purposes. This means that there should be no withholding on the payments. Nor are the payments considered self-employment income. These are technical points, but could provide answers to questions from payroll, accounting, or tax professionals.

Section 139 plans can be a very appealing way for employers to assist employees in need. They are particularly well-suited to large scale disaster events, such as a hurricane or the current COVID-19 pandemic. These plans provide tax-free assistance for employees, while at the same time being deductible for the employers funding them.

Continuing Reading: It’s an Employee Disaster Out There—Section 139 Can Help: Part 2