On March 13th, President Donald J. Trump issued an emergency declaration under the Robert T. Stafford Disaster Relief and Emergency Assistance Act (the “Stafford Act”) in response to the ongoing COVID-19 pandemic.

As a result of the President’s emergency declaration, employers may make “qualified disaster relief payments” to employees to assist the employees in managing the COVID-19 crisis. Such payments are tax-free to the employee and fully deductible to the employer. In addition, qualified disaster relief payments are not subject to federal payroll taxes or information reporting. (Internal Revenue Code Section 139. Unless otherwise indicated, all Section references are to the Internal Revenue Code.)

For purposes of Section 139, a “qualified disaster” includes any federally declared disaster as defined in Section 165(i)(5)(A). Under Section 165(i)(5)(A), a “federally declared disaster” includes any disaster determined by the President to warrant assistance by the Federal Government under the Stafford Act. The COVID-19 pandemic satisfies the requirement in Section 139 of a federally declared disaster.

Payments that qualify as qualified disaster relief payments under Section 139 are tax-free to the recipient employee, but fully deductible to the employer. (In the absence of Section 139, any payment from an employer to an employee would be taxed to the employee as compensation because under rules of general application an employer cannot make a “gift” to an employee, regardless of the intent of the employer in making the payment.)

A “qualified disaster relief payment” for purposes of Section 139 is defined as a payment to reimburse or pay the employee for “reasonable and necessary personal, family, living, or funeral expenses” incurred as a result of COVID-19. Payments are NOT qualified disaster relief payments for purposes of Section 139 if they compensate employees for expenses that are otherwise compensated for by insurance or that are intended to replace lost income. Thus, payments of sick pay or family medical leave remain fully taxable to the employee.

Section 139 has yet to be utilized for a national pandemic, and no regulations have been issued to provide guidance on exactly which expenses and under what circumstances reimbursement or payments may occur. As a result, there is some uncertainty as to the specific types of expenses that will meet the definition of “qualified disaster relief payments.” A reasonable interpretation of the statutory text suggests that at a minimum the following payments from employer to employee should be treated as deductible to the employer and tax-free to the employee, provided the expenses relate to the COVID-19 pandemic:

• Medical expenses;
• Health-related expenses that are not medical expenses, such as over-the-counter medications, hand sanitizers, personal protective equipment;
• Child care and tutoring expenses due to school closings;
• Increased home expenses due to telecommuting, e.g., home office set-up, internet, printer costs;
• Cell phone;
• Increased utility expenses;
• Transportation expenses due to work relocation; and
• Increased cost of home supplies, e.g., disinfectant, soap.

Section 139 does not require that employees achieve a certain period of service before being eligible to receive tax-free payments under the provision, nor is any formal plan or documentation required to be maintained by the employer. Moreover, employees are not required to account for actual expenses, provided that the amount of the payments can reasonably be expected to be commensurate with the expenses that are incurred. Nevertheless, despite the informality permitted by the IRS, it would be wise for employers to document their intention to make payments covered by Section 139, as well as:

• The amounts paid and to whom;
• The start and end date of any Section 139 “program;”
• A general listing of the expenses that will be paid or reimbursed on behalf of the employees; and
• Any maximum amount per-employee or in the aggregate that the employer will pay.