Employer Assistance to Employees During the COVID-19 Crisis

March 27, 2020

By Peter Alwardt

With many of our clients contemplating or already implementing employee furloughs, questions have been posed regarding what assistance employers can provide to employees during the current crisis.

In addition to the extensions of family leave, additional paid sick leave, free virus testing, and other provisions in recent federal and state legislation, 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 to the employer.

Background

IRC Sec. 139 may be used in instances where 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 March 13 President Trump declared the COVID-19 pandemic a national emergency.   Based on this declaration and other guidance, it appears that IRC Sec. 139 has been triggered. 

Types of Assistance to Employees

In a national disaster, IRC Sec. 139 specifically provides that employers may pay or reimburse reasonable expenses the employee incurs for personal, family, living, and funeral expenses not otherwise reimbursed through insurance.  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

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, there is no requirement that the payments be subject to an accountable arrangement in which employees are required to 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 for a group of expenses (e.g., home office expenses).

Tax Reporting

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 the 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.

Conclusion

Employers that would like to utilize IRC Sec. 139 should consider doing so in conjunction with other employee programs they are implementing in response to the COVID-19 pandemic 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.

About Peter Alwardt

Peter Alwardt is a Tax Partner specializing in employee benefits, tax and ERISA issues for domestic and international clients. He is a member of the American Institute of Certified Public Accountants and NY State Society of CPAs.