UPDATE: We have provided an updated analysis of the issues surrounding the availability of Section 139. Our original post is below.
On March 13, 2020, the President declared the COVID-19 pandemic to be an emergency under Section 501(b) of the Robert T. Stafford Disaster Relief and Emergency Assistance Act (the “Stafford Act”). The decision to declare an emergency is addressed in a letter from the President to Administration officials in which he explained that his decision to issue an emergency declaration was “based on the fact that our entire country is now facing a significant public health emergency.”
Employers may be wondering whether this declaration provides an opportunity to offer “qualified disaster relief payments” under Internal Revenue Code Section 139 to employees as a means of mitigating the pandemic’s effects. It is not entirely clear. Because the President declared an emergency—not a major disaster—it is not clear, until we get further guidance from the IRS that employers that they may rely on Code Section 139 as a means of providing tax-free benefits to their employees. Section 139 refers specifically to a declared disaster as do the regulations under section 165(i), which are cross-referenced in the section 139 rules. Less formal IRS guidance in the form of revenue procedures have conflated the two types of declarations in the past, however, and the IRS has indicated that for purposes of section 165(i), “a disaster includes an event declared a major disaster or an emergency.” However, in the interim, employers may still adopt other policies, such as leave-sharing, that will ease the pandemic’s toll on affected employees.
The Application of Code Section 139 Warrants IRS Guidance Immediately
The Stafford Act provides for the declaration of either a major disaster (Section 401) or an emergency (Section 501). In short, an emergency may be declared when federal assistance is needed “to save lives and to protect property and public health and safety, or to lessen or avert the threat of a catastrophe,” whereas a major disaster may be declared when a “natural catastrophe,” such as a hurricane or draught, requires federal assistance to “alleviate[e] the damage, loss, hardship, or suffering caused thereby.” An emergency declaration enables the federal government to provide assistance to state and local governments, whereas a major disaster declaration also allows for direct federal assistance to individuals.
The President declared the COVID-19 pandemic to be an emergency under Section 501(b) of the Stafford Act. The pandemic is not the result of (or cause of) a natural catastrophe, as that term is normally understood, but it remains to seem whether the IRS will view this declaration as triggering the application of relief under Code Section 139. Code Section 139 allows employers to provide tax-free qualified disaster relief payments to employees to help cover certain expenses caused by a “federally declared disaster,” which could be interpreted to mean a major disaster declaration under Section 401 of the Stafford Act—not an emergency declaration under Section 501, such as the March 13, 2020, declaration. Therefore, it is critical that the IRS issue guidance to employers so that they can have comfort in relying on Code Section 139 to provide tax-free benefits to employees.
But even if the IRS were to issue guidance determining that the pandemic is a “federally declared disaster,” Code Section 139 would still restrict the types of expenses employers could cover on a tax-free basis, and only those expenses not otherwise reimbursed, such as through insurance, would be eligible for exclusion. To be a qualified disaster relief payment under Code Section 139, the payment or reimbursement must be for either (1) “reasonable and necessary personal, family, living, or funeral expenses incurred as a result of a qualified disaster,” or (2) “reasonable and necessary expenses incurred for the repair or rehabilitation of a personal residence or repair or replacement of its contents to the extent that the need for such repair, rehabilitation, or replacement is attributable to a qualified disaster.” Wage payments are not listed as eligible expenses under Code Section 139, and the Joint Committee on Taxation has stated that “the [Code Section 139] exclusion does not apply to payments in the nature of income replacement, such as payments to individuals of lost wages, unemployment compensation, or payments in the nature of business income replacement.” It is also unclear whether the purchase of, for example, protective gear would qualify as an eligible expense under Code Section 139, or whether an employee’s status as an essential employee would affect the eligibility of any given expense. The IRS should issue expedient guidance on the applicability of Code Section 139 to specific types of payments driven by the pandemic as opposed to more common natural disasters, such as extra costs for childcare, delivery charges for groceries for quarantined individuals, and commuting expenses exceeding the employee’s normal commuting cost for essential employees unable to use public transportation.
Covington will continue to monitor the Administration and Congress’s response to the pandemic. We will update this blog if new guidance or legislation addresses the application of Code Section 139 under these circumstances.
Leave Banks and Other Measures to Help Employees
In the interim, employers are not powerless to help their workforces navigate the challenges of the COVID-19 pandemic. One option employers may wish to consider is the adoption of a leave-sharing policy.
Leave-sharing allows employees to contribute unused leave to an employer-sponsored leave bank. Employers may structure the leave-sharing policy to accommodate different types and units of donated leave, and can determine what limitations apply to its use. For example, employers should limit the use of the leave bank to those employees who have already exhausted their own paid leave and are experiencing a medical emergency, which, in the context of the COVID-19 pandemic, may encompass an employee’s own illness or caring for a family member who is ill. Leave taken from the bank is includable in the recipient employee’s gross income and is subject to employment taxation, but the donor employee is not taxed on the donated leave. Employers, who decide to adopt leave-sharing policies, may also impose limits on the amount of leave that an employee can donate, and the amount of leave employees can withdraw from the bank. Employers should put in place procedures governing how applications for leave will be processed. Employees generally should not be permitted to select individual employees to receive donated leave.
Employers may also want to consider other measures to mitigate the effects of the pandemic. Covington has prepared a COVID-19 Checklist for U.S. Employer Considerations, which highlights key legal, business, and practical concerns employers should keep in mind over the coming weeks and months. The checklist and other resources are consolidated in Covington’s COVID-19: Legal Business and Toolkit. Employers are invited to join Covington experts on Tuesday, March 17, for a webinar on employment and benefits issues related to the pandemic; a registration link is on the Toolkit landing page.