Refresher on Section 139 – Qualified Disaster Relief Payments

On March 13, 2020, under the Stafford Act¹, the President issued an emergency declaration as a part of the government’s attempts to mitigate the effects of the COVID-19 pandemic. Since that time, business owners have had a lot to handle including mandatory closures, remote working, issues under preexisting contracts (leases, loans, supply contracts, employment agreements, etc.), the Families First Coronavirus Response Act², the CARES Act³ (especially the Paycheck Protection Program), and more.

With these issues for businesses to navigate, in addition to everything a business routinely has to control, one beneficial provision of the Internal Revenue Code has received relatively little attention, §139 of the Internal Revenue Code. §139 was passed in response to 9/11⁴ and allows an employer to provide tax-free assistance to employees, deductible to the employer, in the event of a qualified disaster. The IRS has interpreted the President’s emergency declaration to constitute a qualified disaster.⁵ This is important since, absent §139, an employer cannot make tax free gifts to employees.⁶Given the strong public policy favoring employer assistance for employees in a time of crisis, these benefits seem sensible. Certainly, in the current COVID-19 crisis, the government should encourage employers to provide whatever assistance they can to their employees.

Qualified Disaster Relief Payments

According to §139, a “qualified disaster relief payment” is any amount, except to the extent compensated by insurance or otherwise, paid to or for the benefit of an individual⁷:

• to 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; or
• if such amount is paid by a Federal, State, or local government, or agency or instrumentality thereof, in connection with a qualified disaster in order to promote the general welfare.

There is little developed law in under §139. Guidance as to how these provisions are to be interpreted currently come primarily from two sources – the Joint Committee on Taxation technical explanation⁸ and an IRS Revenue Ruling⁹. From these materials, it seems clear the goal is to be liberal in qualifying for these benefits. For example, there is no requirement to account for actual expenses but merely that the payments are “reasonably expected” from the disaster¹⁰.

Specifically related to the COVID-19 pandemic, it appears the following types of payments may be considered “reasonably expected” as “qualified disaster relief payments” under §139:

• out-of-pocket medical expenses, likely including items such as sanitizing products, gloves, and masks;
• increased childcare costs due to school or other childcare provider closures, including potential costs associated with online education or tutoring;
• increased utility costs;
• increased food costs, including delivery fees; and
• increased costs incurred by working from home such as paper, supplies, higher speed internet, cell phone costs, and computer equipment.

This list is non-exclusive, but a summary of certain expenses that we see commonly incurred by employees as a result of the COVID-19 pandemic. Any expense that constitutes a “qualified disaster relief payment” and is “reasonably expected” from the current crisis likely qualifies unless expressly prohibited (such as costs covered by insurance).

Benefits of § 139 Payments

In line with the policy of liberally granting benefits under §139, there are several benefits to §139 payments, including benefits which are not normal for employer provided payments. Some of these benefits include:

• Payments received by employees are deductible by the employer and tax-free to the employee for both income and employment tax purposes (not reported on a Form W-2 or Form 1099);
• Employees are not required to substantiate their “reasonable” expenses;
• There is no dollar limit to the amount of benefits which may be provided to employees (other than the “reasonably expected” limitation);
• There is no discrimination testing which would limit the ability to disproportionately benefit highly compensated employees; and
• There is no requirement for a formal, written plan document.

As with the list of apparent qualifying expenses, this is a non-exclusive list. However, this is intended to show how Congress has shown a desire for employers to be able to provide meaningful benefits to employees in a tax favorable manner without many of the typical compliance obligations.

Documentation

As indicated above, a benefit of §139 payments is the lack of documentation requirements – a written plan or substantiation of disaster relief payment expenses. However, in order to be sure that an employer can ensure compliance with the requirements of §139, we recommend a writing such as a written plan or corporate resolution that contains certain information. Included in that information would be:

• Recitation of the President’s COVID-19 emergency declaration and IRS’ interpretation of qualification as a 139 “qualified disaster;”
• Description of eligible employees;
• List of COVID-19 related expenses which the employer intends to reimburse, with any limits that may apply, and a method for employees to seek reimbursement; and
• Inclusion of a start and end date.

Due to the lack of any written documentation requirement whatsoever, it likely is not important that this documentation fit any particular model. Rather, the reason for such a writing would be to document the employer’s satisfaction of the requirements of §139.

In addition to this documentation, the employer should maintain sufficient information to substantiate that payments were made to employees pursuant to §139. Some of the types of information that would be kept include:

• Name, address, and employee status of the recipient;
• Verification that employee is impacted by COVID-19 pandemic (at least as to payments made specific to an employee rather than generally to all employees);
• Confirmation of expenses (including that not included by insurance) and that reasonably expected from COVID-19 pandemic; and
• The date and of the payment.

This is the type of information that will be reasonably needed to prepare the employer’s 2020 tax return. By gathering and maintaining this information as payments under §139 are made, the employer can ensure their tax return is properly prepared and sustainable in the event of examination.

Conclusion

As employers work through the stimulus loan programs designed to keep them in business and to keep their employees retained, employers can begin to focus on other planning related to the COVID-19 pandemic¹¹. For employees who will be retained, employers may desire to provide disaster assistance. Some of this assistance may be motivated by a desire to show personal support for employees. This assistance also may be motivated by the desire to maximize employee efficiency and ability to work during this crisis. Whatever the motivation, §139 provides a very beneficial and simple method of getting cash into the hands of employees. To the extent an employer desires to assist employees in meeting their needs (including personal expenses which allow the employee to work from home, for example), by minimally documenting compliance with the statute, the employer can obtain a tax deduction while avoiding taxable income to the employee. This tax result is rare and can be very powerful.

1. Robert T. Stafford Disaster Relief and Emergency Assistance Act, PL 100-707 (Nov. 23, 1988).
2. Families First Coronavirus Response Act, PL 116-127 (March 18, 2020).
3. Coronavirus Aid, Relief, and Economic Security (CARES) Act, PL 116-136 (March 27, 2020).
4. Victims of Terrorism Tax Relief Act of 2001, PL 107-134 (January 23, 2002).
5. See IRC § 139(c)(2), IRC § 165(i)(5)(A), and Notice 2020-17.
6. IRC §§ 61 and 102(c)(1).
7. IRC § 139(b).
8. Joint Comm Staff, Tech Expln of Victims of Terrorism Tax Relief Act of 2001 (Dec. 21, 2001), http://www.jct.gov/x-93-01.pdf.
9. Rev. Rul. 2003-12, https://www.irs.gov/pub/irs-drop/rr-03-12.pdf.
10. Id.
11. Currently, there is no definitive guidance whether § 139 payments to employees constitute a “payroll cost” or “employee salaries, commissions, or similar compensations” for purpose of the CARES Act allowing § 139 payments to qualify as towards loan forgiveness.