In the wake of the COVID-19 pandemic, many employers have had to make difficult decisions regarding the maintenance of their workforce. Employers have taken different approaches—some have reduced employees' salaries and wages, or work schedules, while others have taken the unfortunate step of furloughing or laying off employees. Sensitive to the major financial impact these actions may have on their employees, many of our clients have considered how to provide some financial assistance to the affected individuals. Of course, these employers have explored the familiar avenues—bonuses, retention pay, severance, etc.—all of which constitute taxable income to the employee. Employers may not be aware that there is a potential alternative that would allow employers (or their related foundations) to provide tax-free financial assistance during these difficult times—disaster assistance payments pursuant to Section 139 of the Internal Revenue Code. Below is a brief overview of this option.
What Relief Is Available Under Section 139?
Under Section 139, employers may provide current and former employees with non-taxable disaster assistance payments (Disaster Assistance) to help with expenses caused by a qualified disaster, including the current COVID-19 pandemic. Disaster Assistance can be used to cover reasonable and necessary personal, family, living, or funeral expenses incurred as a result of the pandemic. Disaster Assistance cannot be used for expenses that are covered by insurance or otherwise reimbursed.
I'm an Employer Interested in Providing Disaster Assistance to My Current and/or Former Employees. What Do I Do Now?
Adopt a Disaster Assistance Policy. At a minimum, the policy should identify the individuals entitled to request Disaster Assistance, the reasons for which Disaster Assistance may be requested, and the maximum amount of Disaster Assistance that may be requested. Other criteria may also be part of the policy. All criteria should be objective, non-discriminatory, and uniformly applicable. Note that Disaster Assistance cannot be awarded to compensate for lost wages in and of themselves.
Establish a System to Document Requests, Decisions, and Payments. The employer should maintain records of all Disaster Assistance requests received, determined, and disbursed. These records would typically include such information as the specific purpose for which assistance is requested (e.g., mortgage payment, medical expenses, childcare expenses, etc.), the estimated number of persons assisted, the amount of the assistance requested and granted, and the date of payment. Much of this information can be collected by creating an application form for requesting Disaster Assistance, and maintaining the applications in the employer's records.
Evaluate Requests. Each request for Disaster Assistance should be determined based solely on the employer's established criteria from the policy. When evaluating the amount of Disaster Assistance to provide, the employer should take into account the individual's reasonable financial need relative to the purpose for which the request is being made. Avoid making awards that are proportionate to the applicants' compensation or seniority, as this will not necessarily reflect a reasonable need amount, and can be perceived as providing the employee with lost wages.
Is Disaster Assistance Mutually Beneficial to the Employer and Employee?
Yes. As an initial matter, a Disaster Assistance program is easy to establish and operate and provides quick financial help to individuals without a burdensome administrative process. As noted earlier, Disaster Assistance is non-taxable income to the recipient. It allows the individual to receive the entirety of the benefit, without deductions for payroll taxes, income tax withholding, and similar matters. This prevents employers from having to "gross up" the amount to ensure the employee receives the requested amount. Employers may claim a business deduction for Disaster Assistance payments to employees. Employers who have received a Paycheck Protection Program loan would not, however, be able to count these payments toward loan forgiveness. Note: If the employer has a related foundation, the employer may wish to utilize the foundation to provide Disaster Assistance, in which case there will be additional legal considerations.
This overview only provides a high-level analysis of the benefits available under Section 139. Prior to implementing such a program, employers should understand the more nuanced considerations regarding this alternative. Employers who want to know more about Disaster Assistance pursuant to Section 139 and its tax, employment, and employee benefits law implications should contact Brian Clark at bjclark@Venable.com, Juliana Reno at jreno@Venable.com, Chris Moran at cnmoran@Venable.com, or Allison Gotfried at agotfried@Venable.com.