In an earlier alert, we expressed concern about the applicability of Section 139. Our concern was based on the fact that the President’s declaration of an emergency on March 13, 2020, with respect to the COVID-19 pandemic was under Section 501(b) of the Robert T. Stafford Disaster Relief and Emergency Assistance Act (the “Stafford Act”) pertaining to national emergencies, rather than Section 401 pertaining to disasters. Our alert called on the IRS to issue guidance immediately confirming the application of Section 139, which would permit employers to offer “qualified disaster relief payments” to employees as a means of mitigating the expenses associated with the pandemic’s effects. Based on communications with the IRS, we understand the IRS is considering that request. We now believe, based on recent IRS guidance, that it would be reasonable for employers to take the position that Section 139 is available to employers, but IRS guidance is still needed to make this clear and to provide further clarity on the types of expenses for which it may be used given the unique circumstances of the present emergency.
Since the issuance of our alert asking the IRS for guidance on Section 139’s applicability, the IRS released Notice 2020-17, which extends the April 15 tax payment deadlines for income taxes up to certain thresholds to July 15. In explaining its authority to grant extensions of payments, the Notice relies on Section 7508A. This provision gives the Secretary of the Treasury the authority to postpone the time for performing certain acts under the internal revenue laws for a taxpayer determined by the Secretary to be affected by a “federally declared disaster” as defined in section 165(i)(5)(A). Section 165(i)(5)(A), which is also cross-referenced in Section 139(c)(2) defines that terms as “any disaster subsequently determined by the President of the United States to warrant assistance by the Federal Government under the Robert T. Stafford Disaster Relief and Emergency Assistance Act” without specifying that the declaration must be issued under any particular provision of the Stafford Act. In other words, the IRS has indicated that for purposes of section 165(i), “a disaster includes an event declared a major disaster or an emergency.” Given that the cross-reference in Section 7508A is the same as the one in Section 139, it seems reasonable for employers to rely on Notice 2020-17 to support their position that Section 139 payments may be made.
Guidance on the Scope of Code Section 139 is Still Needed
Even assuming that the IRS views the COVID-19 pandemic as a “federally declared disaster” for purposes of triggering the availability of Code Section 139, we believe guidance is needed on the types of expenses employers could pay or reimburse on a tax-free basis. 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.” (Emphasis added.) Moreover, only those expenses not otherwise reimbursed, such as through insurance, would be eligible for exclusion. 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.” Accordingly, employers should not treat sick pay, severance, or paid leave as disaster relief payments.
Potential Expenses Eligible for Disaster Relief Payments
Nonetheless, an employer could clearly pay some expenses under a Section 139 program:
- Payments for out-of-pocket medical expenses incurred by an employee or his or her spouse or dependents as a result of a COVID-19 diagnosis; and
- Payments for funeral expenses incurred by an employee as a result of COVID-19.
An employer might also be able to provide qualified disaster payments to cover a broad array of other expenses:
- The cost of child care for essential workers whose normal source of child care (including private school, public school, day care, or nursery school) is unavailable due to the pandemic;
- Any increased costs related to the employee being required to work from home, such as printer paper, office supplies, or a home printer;
- Any increased utility costs associated with the employee and his or her family being quarantined or otherwise confined to the home; and
- Any increased commuting cost related to the employee’s inability to commute via the usual means of transportation, such as the difference between the costs of public transportation versus hired car service.
As noted above, however, guidance is needed from the IRS on this list of potential expenses as well as other amounts attributable to the crisis. Some of these payments (such as child care, office supplies, paper, or a printer) could potentially be excluded from wages under other provisions of the Code, e.g., Section 129 or 132, but additional limitations and requirements would apply that do not apply under Section 139.
Design Considerations for a Section 139 Program
Although there are no regulations issued under section 139, the IRS has issued some guidance concerning how to structure a Section 139 program. In Rev. Rul. 2003-12, the IRS laid out facts under which payments would be deemed qualified disaster relief payments. Under the facts of the ruling:
- The employer makes grants to employees that would pay or reimburse the employees for medical, temporary housing, and transportation expenses they incur as a result of a flood that are not compensated for by insurance or otherwise.
- The employer does not require proof of actual expenses to receive a payment.
- The employer’s written program includes requirements to ensure that the grant amounts are reasonably expected to be commensurate with the unreimbursed reasonable and necessary medical, temporary housing, and transportation expenses its employees incur as a result of the flood.
- The grants are not intended to indemnify flood-related losses or to reimburse the cost of nonessential, luxury, or decorative items and services.
- The grants are available to all employees regardless of length of service.
Although an employer does not need to adopt a program identical to one in the ruling, it nevertheless provides helpful guidance about what to consider when putting together a program. For example, a written program document will help ensure that the program is administered fairly and equitably to avoid potential claims of discrimination. Employers should also consider providing notice of the program to employees to ensure those in need of assistance are aware of its availability. Other design parameters that an employer should consider include the following:
- Limiting the program to those affected by the current COVID-19 pandemic;
- The class of employees eligible under the program;
- Any aggregate or per-employee dollar limits on assistance; the types of expenses that will be reimbursed or paid;
- A description of the payment methodology;
- The process for employees to request assistance (e.g., written application, telephone, email);
- Identification of who will be granted the discretion to determine whether to pay a claim;
- The date, which may be retroaction, on which expenses will be eligible for reimbursement/payment; and
- The date by which claims must be submitted (e.g., 30 days following the end of the declared emergency).
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.