Employer Assistance to Employees in Natural Disasters

With the fires in Los Angeles County still burning out of control, many of our clients in California may already or will have questions regarding what assistance employers can provide to employees during the current disaster. In addition to any forthcoming federal and state legislation that may provide relief to victims of the wildfires, Internal Revenue Code (IRC) Sec. 139 provides employers that wish to provide additional assistance to employees a mechanism to make payments that are tax-free to employees and deductible for the employer.  

Overview of IRC Sec. 139 for Disaster Relief 

IRC Sec. 139 may be used when the president declares a national disaster under the Stafford Act. Once the declaration is made, employers may use IRC Sec. 139 to provide a variety of assistance to employees.  

On January 8, President Biden declared the wildfire in California a major disaster. Based on this declaration, IRC Sec. 139 has been triggered.  

Types of Assistance for Employees  

In a major disaster, IRC Sec. 139 specifically provides that employers may pay or reimburse reasonable expenses the employee incurs for personal, family, living, and funeral costs not otherwise reimbursed through insurance. Reimbursements should not bear any resemblance to income replacement. 

Eligible Expenses for Employee Reimbursement 

Under the current circumstances, expenses such as child care or tutoring due to school closings; work-from-home expenses including the cost of establishing a home office with related increased utility costs, higher costs for internet, printers, cell phone, and similar items; increased costs for unreimbursed health-related expenses; and increased transportation costs due to work relocation such as driving to work rather than using public mass transit may be considered as reasonable to reimburse or pay to employees.  

Documentation Requirements 

IRC Sec. 139 does not require the employer to have a formal written program. However, best practice would dictate that some guidelines are formally adopted and communicated to employees by the employer. Additionally, the payments are not required to be subject to an accountable arrangement in which employees must submit evidence of the expense. Employers, however, will want to consider either confirming expenses or deciding on a flat amount to be paid for each type of expense or group of expenses (e.g., home office expenses).  

Tax Reporting Requirements for Employers and Employees 

For employees, payments made under IRC Sec. 139 are not subject to any federal withholding tax obligations and do not need to be reported on a Form W-2. State tax reporting should generally follow federal reporting; however, this should be confirmed for each state.  

For the employer, IRC Sec. 139 provides that the payments are deductible for federal tax purposes. State tax treatment should be confirmed on a state-by-state basis.  

Integrating IRC Sec. 139 With Other Employee Programs 

Employers that would like to utilize IRC Sec. 139 should consider doing so in conjunction with other employee programs they are implementing and consult labor counsel to assist with the terms of payment and expenses to be reimbursed/paid. Further, they should consult with their tax advisor to confirm the tax treatment for their particular situation.