The IRS recently updated its FAQs discussing the two COVID-19-related payroll tax credits under the Families First Coronavirus Response Act (“FFCRA”) to confirm the availability of section 139 disaster relief programs to respond to employee needs during the COVID-19 pandemic. However, the FAQ also serves to remind employers of the scope of Section 139:
58. Are qualified sick leave wages and qualified family leave wages excluded from gross income as “qualified disaster relief payments”?
No. Section 139 of the Internal Revenue Code (Code) excludes from a taxpayer’s gross income certain payments to individuals to reimburse or pay for expenses related to a qualified disaster (“qualified disaster relief payments”). Although the COVID-19 outbreak is a “qualified disaster” for purposes of section 139 the Code (see below), qualified leave wages are not excludible qualified disaster relief payments, because qualified leave wages are intended to replace wages or compensation that an individual would otherwise earn, rather than to serve as payments to offset any particular expenses that an individual would incur due to COVID-19.
Although the FAQ specifically addresses the treatment of qualified sick and family leave wages under the FFCRA, the guidance applies equally to other forms of wage replacement payments, including other forms of paid leave, severance, and furlough pay. As many employers have been forced to lay off or furlough employees, a number of employers have sought to ease employees’ financial strain by providing transitional payments. The FAQ is a reminder that these types of payments do not generally qualify as disaster relief payments under section 139 because they are intended as income replacement and are not intended to reimburse or pay reasonable and necessary personal, family, living, or funeral expenses incurred as a result of a qualified disaster. In our earlier article, we discussed design considerations for Section 139 programs and provided examples of expenses that could potentially be reimbursed or paid under a Section 139 disaster relief program, including:
- 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.
In addition, 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.
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. As we noted in our earlier article, guidance is needed from the IRS on this list of potential expenses as well as other amounts attributable to the crisis.