Qualified disaster relief payments under section 139

Nov 10, 2022

Key takeaways

Employers can provide tax-free relief payments to assist with personal needs from a disaster.

Qualified disaster payments are excluded from employees’ gross income and deductible to employers.

Companies may want a policy for reimbursements they are willing to cover under section 139.

Labor and workforce Business tax Employee benefits Compensation & benefits

Qualified disaster relief payments under section 139 are amounts paid to or for the benefit of an individual to reimburse or pay reasonable and necessary:

(1) personal, family, living or funeral expenses incurred as a result of a qualified disaster; or

(2) 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.

These expenses are tax-free only to the extent not compensated by insurance or otherwise.

A qualified disaster is defined as one of the following:

  • a federally declared disaster (as determined by the President of the United States to warrant assistance by the Federal Government under the Robert T. Stafford Disaster Relief and Emergency Assistance Act – see FEMA website for list of federally declared disasters),
    • When a federally declared disaster is announced, FEMA publishes a declaration page that includes the incident period, declaration date, designated area and various links to local and national disaster resources.
  • a disaster which results from a terroristic or military action,
  • a disaster resulting from an accident involving a common carrier (or other event) determined by the Secretary to be of a catastrophic nature, or
  • other disasters determined by an applicable Federal, State or local authority to warrant assistance from the Federal, State, or local government or agency or instrumentality which issued relief in connection with a qualified disaster in order to promote general welfare.

Qualified disaster payments are excluded from the employee’s gross income and are deductible to employers as a business expense. The payments may or may not be excluded from state income tax since state laws vary.

Employees are not required to account for actual expenses in order to qualify for the exclusion, provided that the amount of the payments they receive are reasonably expected to be commensurate with the expenses incurred. Depending on the disaster, those expenses may differ. In a hurricane, for example, expenses may include lodging, property damage, food while displaced, or household possessions.

Employers may need to ask employees questions to help ascertain their needs:

  • What are your immediate needs? What expenses are incurring?
  • Do you have property damage?
  • What expenses will your insurance cover?

Though section 139 plans do not follow the same strict substantiation rules as some other types of employer reimbursements do, having some of this information will help employers support that any payments made to employees were reasonably related to expenses that were actually incurred due to the disaster and that were not reimbursed by insurance.

Employees are not entitled to any other tax deduction or credit on their individual income tax returns pertaining to expenses for which they receive qualified disaster relief payments from their employers. It is important to note that section 139 never includes ‘income replacement.’ Rather the payments are meant to reimburse or pay for items that are additional expenses directly related to the disaster. Companies may want to have a general policy in place for the types of reimbursements or items they are willing to pay for under section 139.

RSM contributors

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