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