Prior to the September 11, 2001 attacks, employers were more limited in their ability to provide emergency relief payments to their employees. Payments made by employers directly to their employees were generally fully taxable to the employees, and employers were generally required to pay the employer’s portion of FICA taxes, on top of any taxes withheld from the employees. The taxability of such payments reduced the amount that employees could ultimately use to pay living expenses. While Section 501(c)(3) charities could make tax-free grants to individuals, and while employers could contribute funds to such charities, there were significant restrictions on the class of people that such charities could benefit. In particular, charities generally had to select beneficiaries based upon their financial need, and not based upon who employed them.
The September 11, 2001 attacks created a great need to get funds into the hands of victims of the attacks, and the obstacles to making relief payments became more prominent. Congress responded by enacting Code Section 139, as part of the Victims of Terrorism Tax Relief Act of 2001.
Code Section 139(a) provides that gross income does not include any amount received by an individual as a “qualified disaster relief payment.” A qualified disaster relief payment generally includes a payment to or for the benefit of an individual if:
Qualified disaster relief payments may not, however, reimburse recipients for expenses that are compensated for by insurance or otherwise. In addition, the IRS has taken the position that qualified disaster relief payments do not include: (1) amounts intended “to replace wages or compensation that an individual would otherwise earn” or (2) “income replacements such as sick leave or other paid time off paid by an employer.”
A qualified disaster includes: (1) a disaster resulting from certain terroristic or military actions, (2) certain federally declared disasters, (3) a disaster which results from an accident involving a common carrier, or from certain other events determined to be of a catastrophic nature, or (4) with respect to certain payments by certain governmental authorities, certain disasters determined by the applicable authority to warrant government assistance. In an FAQ related to tax credits for mandatory paid leave under the Families First Coronavirus Response Act, the IRS confirmed that the COVID-19 pandemic is a qualified disaster.
For employers and employees, qualified disaster relief payments provide several federal income tax advantages over other types of relief payments:
In making qualified disaster relief payments to employees in connection with the COVID-19 pandemic, employers should keep in mind the following points: