Helping employees impacted by hurricanes and other major disasters
Due to the recent hurricanes in the southern U.S., many employers are looking for ways to provide financial assistance to their employees who have been impacted by these major disasters. There are several tax-advantaged methods employers can use to provide financial support to these employees.
One way employers can help their employees is by making direct payments to them to pay or reimburse their personal, family, living or funeral expenses incurred as a result of a federally-declared disaster. Payments for medical care, temporary housing, and transportation can also be made. In addition, an employer can provide funds to an employee for the repair of his or her home and for the repair or replacement of the home’s contents.
These payments are not taxable wages to the employee and thus are exempt from federal income tax, employment taxes and Form W-2 reporting if they meet the requirements to be qualified disaster relief payments. In order to be nontaxable, the payments must be for reasonable and necessary expenses that are not compensated for by insurance or any other means.
Other methods that employers use to help employees include employer-sponsored donor advised funds, private foundations and public charities. A donor advised fund is created when an employer establishes and funds a separate account held by an existing community foundation or public charity solely to benefit employees impacted by a qualified disaster. Some employers choose to set up their own entity, either a private foundation or a public charity, to provide assistance to employees who suffer loss due to a disaster.
If properly structured, the payments that the affected employees receive from these entities are not taxable wages to them. Furthermore, other employees of the employer may be able to make tax-deductible contributions to these entities to aid in the relief efforts.
There are also two tax-advantaged ways that employees can use their accrued paid leave to help their fellow employees: leave donation and leave sharing. In a leave donation plan, employees trade their paid leave for cash payments made by their employers to charities. The leave is not taxable income to the leave donor if made to a qualified charity by a specific date set by the IRS, for example, by Jan. 31, 2019, for Hurricanes Harvey and Irma. In a leave sharing plan, employees donate their leave for use by the recipient employee as additional paid time-off. Leave sharing plans which meet the IRS requirements treat the donated leave as taxable wages of the recipient and not of the donor.
With proper planning, employers and employees can help disaster victims via tax-advantaged ways. Visit our resource center for more information on disaster relief and recovery.