Employers Can Provide Tax-Free Disaster Assistance to Employees

Section 139 of the Internal Revenue Code allows an employer to provide tax-free qualified disaster relief payments to Texas and Louisiana employees in designated areas affected by Hurricane Harvey.

In Depth

The Internal Revenue Code (Code) allows an employer to provide tax-free disaster relief to its employees in those instances that the payments constitute qualified disaster relief payments. To qualify for the tax-free treatment, Code Section 139 defines a “qualified disaster relief payment” to mean any amount paid to or for the benefit of an individual, including payments to employees:

  • To reimburse or pay reasonable and necessary personal, family, living or funeral expenses incurred as a result of a qualified disaster; or
  • To reimburse or pay reasonable and necessary expenses incurred for the repair or rehabilitation of a rented or owned personal residence (or to repair, rehabilitate or replace its contents) damaged by a qualified disaster.

Of importance, qualified disaster relief payments exclude any income replacement payments, such as payments of lost wages, lost business income or unemployment benefits. In addition, although an employee is not required to substantiate that the qualified disaster relief payments are related to a qualified disaster, the employer may exclude such payments from the employee’s income only to the extent that insurance does not otherwise compensate the employee for the loss.

A “qualified disaster” under Code Section 139 includes a presidential-declared disaster or an event the Secretary of the Treasury determines is catastrophic. Localities impacted by Hurricane Harvey that have designated for qualified disaster treatment include:

Texas Counties: Aransas, Bee, Brazoria, Calhoun, Chambers, Colorado, Fayette, Fort Bend, Galveston, Goliad, Hardin, Harris, Jackson, Jasper, Jefferson, Kleberg, Liberty, Matagorda, Montgomery, Newton, Nueces, Orange, Refugio, Sabine, San Jacinto, San Patricio, Victoria, Waller and Wharton

Louisiana Parishes: Beauregard, Calcasieu, Cameron, Jefferson Davis and Vermillion

Although qualified disaster relief payments assist employees, the payments also confer tax benefits on the employer and the following:

  • Qualified disaster relief payments are not subject to federal income or employment taxes, and are not subject to withholding and reporting requirements for such taxes; and
  • Qualified disaster relief payments may be made in cash or in kind, and there is no dollar limit.

Given the benefits of tax-free status for qualified disaster relief payments, employers that choose to provide such payments should consider adopting an administrative system that validates such payments meet Code Section 139 requirements. Such a system can include a short application form for assistance that validates the disaster for which relief is sought, contains an affirmative statement from the employee that the requested funds are necessary for expenses and repairs incurred as a result of the disaster, and confirms that such expenses are not reimbursable by insurance.

For more information on qualified disaster relief payments, contact your regular McDermott employee benefits lawyer or one of the authors.

 

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Amy Gordon focuses her practice on welfare benefits compliance with the Health Insurance Portability and Accountability Act (HIPAA), the Employee Retirement Income Security Act (ERISA), the Public Health Service Act, the Internal Revenue Code, the Affordable Care Act (ACA), and related federal and state laws and regulations. She regularly advises clients on their self-funded and insured health plans, wellness programs and on-site clinics. She also handles fiduciary issues, including prohibited transactions and other ERISA Title I matters and represents clients before the US Department of Labor, Employee Benefits Security Administration. Amy assists clients in designing and maintaining compliant flexible benefit, life, medical, dental, pharmacy, employee assistance programs (EAP), educational assistance, disability, supplemental health, severance, Health Savings Accounts, Health Reimbursement Accounts and other types of welfare plans. She also consults with clients regarding the design and compliance of wellness programs and initiatives. She has extensive experience with assisting clients who transition their employees and/or retirees to the public and private Marketplace Exchanges. Amy also provides guidance on retiree benefit plans, including Financial Accounting Standards Board (FASB) liability issues and funding options. Previously, Amy served as in-house counsel to Prudential Financial, formerly Prudential Insurance Company of America. She advised Prudential on its current and new products, including long-term and short-term disability, health insurance, life insurance, guaranteed products, individual retirement accounts (IRAs) and pension plan investments. She also represented the company in various fiduciary and prohibited transaction matters. Before that, she worked in the New York Regional Office of the Department of Labor, Employee Benefits Security Administration (EBSA), formerly the Pension and Welfare Benefits Administration (PWBA). During her EBSA tenure, she prepared a number of high-profile civil and criminal litigation actions brought by the Department of Labor and the US Attorney’s office.

Amy Gordon

Amy Gordon focuses her practice on welfare benefits compliance with the Health Insurance Portability and Accountability Act (HIPAA), the Employee Retirement Income Security Act (ERISA), the Public Health Service Act, the Internal Revenue Code, the Affordable Care Act (ACA), and related federal and state laws and regulations. She regularly advises clients on their self-funded and insured health plans, wellness programs and on-site clinics. She also handles fiduciary issues, including prohibited transactions and other ERISA Title I matters and represents clients before the US Department of Labor, Employee Benefits Security Administration. Amy assists clients in designing and maintaining compliant flexible benefit, life, medical, dental, pharmacy, employee assistance programs (EAP), educational assistance, disability, supplemental health, severance, Health Savings Accounts, Health Reimbursement Accounts and other types of welfare plans. She also consults with clients regarding the design and compliance of wellness programs and initiatives. She has extensive experience with assisting clients who transition their employees and/or retirees to the public and private Marketplace Exchanges. Amy also provides guidance on retiree benefit plans, including Financial Accounting Standards Board (FASB) liability issues and funding options. Previously, Amy served as in-house counsel to Prudential Financial, formerly Prudential Insurance Company of America. She advised Prudential on its current and new products, including long-term and short-term disability, health insurance, life insurance, guaranteed products, individual retirement accounts (IRAs) and pension plan investments. She also represented the company in various fiduciary and prohibited transaction matters. Before that, she worked in the New York Regional Office of the Department of Labor, Employee Benefits Security Administration (EBSA), formerly the Pension and Welfare Benefits Administration (PWBA). During her EBSA tenure, she prepared a number of high-profile civil and criminal litigation actions brought by the Department of Labor and the US Attorney’s office.

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