Employers may provide disaster relief payments and/or charitable assistance to employees in several ways. The following includes brief descriptions of each scenario in the context of the COVID-19 pandemic and corresponding explanations of the tax consequences to employers and employees.
1. Direct Payments. If the national pandemic caused by COVID-19 is a “qualified disaster” under Internal Revenue Code section 139, employers may make disaster relief payments directly to employees without having to include those payments in the employees’ taxable wages. Employers may also fully deduct these payments from their taxable income. Under section 139, qualified disaster relief payments include reasonable and necessary personal, family, living, or funeral expenses incurred as a result of a qualified disaster. Although section 139 has not been implemented during a pandemic before, it is reasonable to assume that employers could make payments to or on behalf of employees to cover personal or family medical expenses not covered by insurance, costs of over-the-counter medicine, supplies needed to maintain a healthy living environment, and other personal expenses incurred as the result of the COVID-19 pandemic.
Because of specific disaster declarations made by the President, the COVID-19 pandemic is a “qualified disaster” in Washington, California, New York, Iowa, Louisiana, Texas, Florida, and North Carolina. Thus, employers may make section 139 disaster relief payments to employees located in those states.
It is currently unclear whether the COVID-19 pandemic is a “qualified disaster” under section 139 for states and locations that have not received a specific disaster declaration from the President. On March 13, 2020, the President declared a nationwide “emergency” due to the pandemic. However, section 139 requires that a “disaster” must be federally declared, and the President has not yet formally declared a “disaster” with respect to other states and locations. In addition, while the IRS referenced a “Federally declared disaster” in Notice 2020-18 (authorizing an extended due date for personal income tax returns due to the COVID-19 pandemic), the IRS has not explicitly stated or confirmed that the COVID-19 pandemic is a “federally declared disaster” on a nationwide basis for purposes of section 139. Accordingly, at this time and in the absence of specific clarification from the IRS, employers may not be able to provide employees with Section 139 tax-free qualified disaster payments except for employees in locations that have received a specific disaster declaration from the President.
2. Employer-Sponsored Donor Advised Funds. Some charitable organizations establish funds to hold donations received from donors and permit the donors to retain advisory privileges over investment or distribution of the donated funds. Ordinarily these funds, known as donor-advised funds, cannot be used to make grants to individuals. However, an exception exists for certain employer-related funds established to benefit employees and their families who are victims of certain disasters.
Such a fund must serve the single purpose of providing assistance to employees and their family members who are suffering from a “qualified disaster,” as defined in section 139. It must also meet certain other legal requirements, including a requirement that grant recipients be selected based on an objective determination of need and by an independent selection committee or using adequate substitute procedures to ensure that any benefit to the employer is incidental and tenuous.
As noted above, the COVID-19 pandemic has been federally declared to be a disaster in certain locations. Thus, donor advised funds organized exclusively to provide relief from COVID-19-related hardships may make distributions to employees in those locations who are suffering from the pandemic. As also noted above, pending IRS guidance and clarification regarding whether a federally declared disaster currently exists on a nationwide basis, it is currently unclear whether donor-advised funds organized exclusively to provide relief from COVID-19-related hardships may make distributions to employees in locations that have not yet received a specific disaster declaration from the President.
3. Employer-Sponsored Private Foundations. Following the September 11th, 2001 terrorist attacks, and subject to certain restrictions and requirements, an employer-sponsored private foundation may provide financial assistance directly to employees and their families affected by “qualified disasters,” as defined in section 139.
As noted above, the COVID-19 pandemic has been federally declared to be a disaster in certain locations. Thus, an employer-sponsored private foundation could provide financial assistance directly to employees and their families in these specific locations, where such employees and their families been affected by the COVID-19 pandemic. As also noted above, pending IRS guidance and clarification regarding whether a federally declared disaster currently exists on a nationwide basis, it is currently unclear whether an employer-sponsored private foundation could provide financial assistance directly to employees and their families in locations that have not yet received a specific disaster declaration from the President.
The financial assistance payments can be made by the foundation to employees and their families as long as certain safeguards are in place to ensure that such assistance serves charitable purposes, rather than the business purposes of the employer. In addition, the payments can only be made to employees or their family members affected by qualified disasters, not in non-qualified disasters or in emergency hardship situations.
If these and other requirements are met, an employer-sponsored private foundation’s payments in response to a qualified disaster (1) will be treated as made for its charitable purpose; (2) will not result in prohibited self-dealing merely because the recipients are employees; and (3) will not result in taxable compensation to the employees.
4. Employer-Sponsored Public Charities. Employee assistance funds that qualify as public charities may make payments to employees and their families to assist in a broad range of situations, not just “qualified disasters.” As long as the employer does not exercise excessive control over the organization, an employer-sponsored public charity may establish a fund to assist employees and their family members in response to any type of disaster or hardship situation. Other requirements must be met, including that (1) the class of beneficiaries must be large or indefinite; (2) the recipients must be selected based on an objective determination of need; and (3) the recipients must be selected by an independent selection committee or adequate substitute procedures must be in place to ensure that any benefit to the employer is incidental and tenuous.
If these and other requirements are met, an employer-sponsored public charity’s payments in response to a disaster or emergency hardship are presumed (1) to be made in furtherance of the organization’s charitable purpose and (2) not to result in taxable compensation to the employees.
