Helping Employees with COVID-19 Expenses – Employee Tax-Free Disaster Relief Payments
While we as a firm stay up-to-date on current developments, we wanted to make you aware of an opportunity for employers to provide tax-free assistance to employees.
With the declaration by President Trump of COVID-19 as a national disaster, Section 139 of the Internal Revenue Code would allow for employers to make qualified disaster relief payments to employees that are “to reimburse or pay reasonable and necessary personal, family, living, or funeral expenses incurred as a result of a qualified disaster.” Such qualified payments are deductible to the employer and not included in the income of the employee.
While the IRS has not released specific guidance on specific allowed or unallowed expenses, an argument can be made that the following expenses qualify as disaster relief payments (the list is not all inclusive):
- unreimbursed COVID-19 medical expenses (e.g., copays incurred for COVID-19 treatment or over-the-counter medications used to treat COVID-19);
- work-from-home expenses (e.g., costs to create home office, such as purchasing a printer or home phone; increased utility costs on account of the home office; cost of new or expanded internet access);
- dependent care expenses (e.g., increased childcare or tutoring costs due to school closings; remote learning or home-schooling expenses, such as home internet, computer for use by a dependent, educational materials, subscriptions to online educational resources, etc.);
- increased transportation expenses (e.g., increased commuting costs from lack of access to public transportation);
- funeral expenses (e.g., expenses attributed to the funeral of an employee, his or her spouse or dependent, who dies from a COVID-19 infection); and
- other living expenses on account of an employee’s known exposure to COVID-19 (e.g., cleaning products to sanitize home, etc.).
Qualified disaster relief payments must NOT include (i) payments for expenses that are otherwise paid for by insurance or other reimbursements; or (ii) income replacement payments, such as the payment of lost wages, lost business income, or unemployment compensation. In addition, nonessential items, luxury items, decorative items (i.e. Netflix subscription) are excluded.
While not required, as a best practice, an employer may want to adopt a written plan or policy communicating at a minimum the following information to employees:
- who is eligible for such payments;
- what expenses will be reimbursed or paid and whether there are limits on the amount of reimbursements or payments;
- whether employees must provide receipts or other proof of their expenses to the employer to be eligible for payments; and
- how and at what time payments are made.
If the employee is not required to provide receipts, the employer may want to have the employee sign a certification that expenses were incurred.
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