Since you asked: Can we provide financial assistance to employees affected by a natural disaster?

Question

Our company is considering offering disaster relief payments to help our employees impacted by recent natural disasters. Can you explain how this can be done and any related tax consequences?

Answer

During a declared national emergency, an employer can provide what are referred to as “qualified disaster relief payments” under Internal Revenue Code (IRC) section 139. These are tax-preferred payments (e.g., the payments are excluded from gross income, wages and compensation subject to tax) employees can use for reasonable out-of-pocket expenses arising from a qualified natural disaster.

• Examples of eligible expenses:
  • Living expenses
  • Disaster-related medical expenses
  • Funeral expenses
  • Expenses to repair or rehabilitate a personal residence
  • Expenses to repair or replace contents of a personal residence affected by the disaster
• Examples of ineligible expenses:
  • Income replacement, such as wages, paid sick time and paid time off
  • Expenses covered by insurance payments or other sources
• Employee tax treatment: Employees are not subject to income or payroll withholding taxes on qualified disaster relief payments.
• Employer tax treatment: Employers may take a tax deduction for qualified disaster relief payments made to employees. Those amounts also are not subject to payroll taxes, income tax withholding or income tax reporting (e.g., the amounts do not need to be reported on an employee’s W-2).
• State income taxation: Generally, state treatment for income tax withholding purposes will mirror the federal treatment of qualified disaster relief payments, but this will need to be confirmed by legal counsel.
• Establishing a disaster relief payment program: Although IRC section 139 does not require employers to adopt a written plan or policy to make qualified disaster payments, best practice would be to do so. Such a plan or policy would communicate, at minimum, the following information to employees:
  • Who is eligible for such payments
  • What expenses will be reimbursed or paid along with associated limits, if any
  • Whether employees must provide receipts or other proof of their expenses to the employer to be eligible for payments
  • How and at what interval payments are made

Takeaways

Employers wishing to help their employees recover from a natural disaster through qualified disaster relief payments in compliance with IRS rules should consider the following:

• The administrative burden of implementing a disaster relief payment program
• The cost and scope of such a program, given the potential for widespread employee participation
• Privacy concerns, particularly if the sponsoring employer is requesting documentation
• Tax consequences under state and other non-federal laws (discussed and reviewed with legal counsel)