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April 15, 2014

Employers Can Provide Tax-Free Disaster Assistance to Employees

Section 139 of the Internal Revenue Code (Code) allows an employer to provide tax-free disaster relief to its employees, and the employer may take a tax deduction for these payments, if the payments constitute qualified disaster relief payments.  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.

The Internal Revenue Code (Code) allows an employer to provide tax-free disaster relief to its employees, and the employer may still take a tax deduction for these payments, if 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
  • 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 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 Sandy that have been designated for qualified disaster treatment include:

  • Connecticut Counties: Fairfield, Mashantucket Pequot Indian Reservation, Middlesex, New Haven and New London
  • New Jersey Counties: Atlantic, Bergen, Cape May, Essex, Hudson, Middlesex, Monmouth, Ocean, Somerset and Union
  • New York Counties: Bronx, Kings, Nassau, New York, Queens, Richmond, Rockland, Suffolk and Westchester

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
  • 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.

© 2014 McDermott Will & Emery

About the Author

Jonathan J. Boyles, McDermott WIll Emery Law Firm, Labor Employment Attorney
Partner

Jonathan J. Boyles is a partner in the law firm of McDermott Will & Emery LLP and is based in the Firm's New York office.  He counsels clients on a wide array of employee benefit issues, including ERISA’s fiduciary obligations, plan design issues, and reporting and disclosure requirements.  His practice has a special emphasis on benefits issues and integration in corporate transactions, investment product design considerations in dealing with benefit plan investors, multiemployer plan issues and executive compensation issues for nonprofits.  He has...

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About the Author

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Robert C. Louthian is a partner in the law firm of McDermott Will & Emery LLP and is based in the Firm's Washington, D.C. office.  He focuses his practice on the representation of exempt organizations on a wide range of tax and related issues, including determinations of exempt status, securing private letter rulings on proposed transaction, and preparing and representing clients who are under audit by the Internal Revenue Service.  He works primarily with hospitals and other institutional providers, private foundations, scientific research organizations, universities...

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Ruth Wimer, Esq., CPA, is a partner in the law firm of McDermott Will & Emery LLP and is based in the Firm’s Washington, D.C., office.  She focuses her practice on matters related to executive compensation including international, fringe benefits, personal use of employer aircraft and qualified and non-qualified deferred compensation.

Ruth has extensive experience advising clients on structuring optimum ownership of business aircraft, factoring in deduction and income inclusion for personal use, excise tax, depreciation, ...

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