Without a doubt, 2020 has been a time of great uncertainty. Many employers are looking for ways to assist employees who have been impacted by COVID-19. Employees of long-term care assisted living and retirement living homes have been at the forefront of helping those who are most vulnerable.
What can an employer do?
Since COVID-19 has been declared a national emergency, employers can assist employees with qualified disaster relief payments that are tax-free to their employees and fully deductible to employers. This program is referred to as IRC 139 qualified disaster relief. These payments are neither subject to federal tax withholding, nor do they need to be reported on Form W-2 or Form 1099-MISC. This treatment applies to both nonprofit and for-profit entities.
Most states also follow this treatment, but you will need to confirm your state’s treatment.
So, what are some examples of reimbursable expenses due to the impact of COVID-19?
Most IRC 139 qualified disasters deal with natural disasters such as hurricanes, tornadoes, wildfires and flooding, and therefore there is little guidance on what types of expenses can be covered in connection with a global health crisis. Some expenses to consider are:
- Additional childcare costs such as daycare, tutoring costs due to school closings, and living expenses for college students returning home.
- Expenses associated with setting up or maintaining a home office, such as enhanced internet connections, computer monitors, laptops, printers, office supplies, cell phone, etc.
- Increased expenses associated with being quarantined at home, such as utilities.
- Purchase of hand sanitizers, home disinfectant supplies, etc.
Although most healthcare workers are at the forefront and working daily at their work location, they will still incur additional expenses due to COVID-19.
What expenses cannot be reimbursed?
There are generally three categories that cannot be reimbursed under IRC 139:
- Payments for expenses that are not reasonable and necessary
- Payments that constitute an income replacement program such as lost wages, lost business income or unemployment benefits
- Payments that are reimbursed or reimbursable by insurance or otherwise
Does the employee need to substantiate expenses?
There is no requirement for employees to account for or substantiate actual expenses in order to qualify for the exclusion, provided that the amount of the payments can be reasonably expected in line with the expenses incurred.
Does the employer need to have an official plan for IRC 139 reimbursement?3h
While there is no requirement for a written plan document, employers should consider a written plan outlining when employees are eligible for qualified disaster relief payments and what qualifies as reimbursable expenses. A plan could include an affirmative statement from the employee that the requested funds are necessary for expenses associated with COVID-19 and confirm that the expenses are not reimbursable by insurance.
In addition, there is no limit on the amount that an employer can provide to an employee as a qualified disaster payment. Therefore, the employers may want to consider installing a cap on the amount of reimbursement per employee. Some employers will simply give every employee the same amount of assistance.
This is the first time that a qualified disaster has been declared for a non-natural occurrence, and IRC 139 payments for COVID-19 related expenses allow generous assistance to employees. This program fits very well with employers that have employees who have been assisting the population of the most vulnerable persons during this chaotic time. If you are looking for a way to assist your employees with the adverse financial impact of COVID-19, this may be the program you need.
For more information on actions organizations can take during the COVID-19 pandemic, visit our COVID-19 resource center.