Disaster relief payments are not a new concept. While applicable to the pandemic, many may not realize that Section 139 disaster relief payments could also help both employers and their employees in the future during other qualifying disasters. With the prevalence of hurricanes, wildfires, earthquakes, and other natural disasters, these payments can make a difference when employees need help the most. These payments are both excluded from the employee’s income and are tax-deductible by the employer. Payroll taxes are not owed on payments made under a §139 Disaster Relief Payment Plan (§139 Plan) as they are not considered wages.
There are limitations to what can be considered a qualified disaster payment. First, the situation must meet the definition of a “qualified disaster” under §139(c). Of the four qualifying categories, the most common is federally declared disasters (as defined by §165(i)(5)(A)). Historical examples of these disasters as listed on the Form 4684 instructions include Hurricane Harvey and the 2017 California wildfires. Once this hurdle is passed, to the extent that the employee incurs expenses that exceed any insurance proceeds received related to the incident, certain types of payments can be included in a §139 Plan. These include:
- Reasonable and necessary personal, family, living, or funeral expenses
- Reasonable and necessary expenses for the repair of a personal residence or replacement of the contents
- Payments by a common carrier by reason of death or personal injury
- Payments by a governmental agency to promote the general welfare
More specifically, Rev. Rul. 2003-12 includes medical, housing, or transportation needs. Repairs to residences are included as well, even if the property is rented.1 It was generally accepted that during the COVID-19 pandemic, additional tutoring or homeschooling expenses also might be qualified.
Further, although not specifically required, it is recommended that the §139 Plan be outlined in a written document for employees. The §139 Plan generally should specify details such as the specific disaster to which it relates, the types of expenses that are covered, and the maximum amount of reimbursement (if a maximum is chosen). A written document also helps provide employees with notification of the benefit as well as the rules so employees know what type(s) of reimbursement(s) they can request.
Section 139 Plans allow employers to take care of their employees in some of the most challenging circumstances. Considering disasters are never expected, being aware of these opportunities and taking proactive action to put a plan in place can prove important in future times of need.
If you have any questions on your eligibility, please reach out to your tax advisor at FORVIS or submit the Contact Us form below.
- 1Joint Committee Staff, Technical Explanation of Victims of Terrorism Tax Relief Act of 2001 (JCX-93-01),12/21/2001, p. 16)