BY KELSEY MAYO and HANNAH MUNN
The landscape for attorneys has been changing quickly in the wake of COVID-19. Many are seeing an influx of inquiries from clients asking how they can best protect their employees and businesses while living and working through the COVID-19 emergency. Attorneys should be heartened to learn of a form of federal relief that may be tailored to suit the needs of a diverse range of clients and client needs. Perhaps best of all, this relief—the ability for businesses to provide employees with tax-free benefits to cover certain COVID-19-related expenses under Section 139 of the Internal Revenue Code—is available immediately.
What benefits may be provided under Section 139?
Section 139 provides that individuals may exclude “qualified disaster relief payments” from gross income. These include amounts paid to reimburse or cover reasonable and necessary “personal, family, living, or funeral expenses” incurred as a result of a qualified disaster such as COVID-19. (Although there was some initial uncertainty, it now seems relatively clear that COVID-19 is a “qualified disaster” within the meaning of Section 139.)
So, what do these expenses include? There isn’t much guidance here, but the exclusion likely includes amounts paid by employers to employees to cover:
- Childcare or tutoring expenses where schools are closed due to COVID-19 (or, for employers such as hospitals and other first responder agencies, where parent-employees must work extended hours for COVID-19 relief);
- Working from home expenses, likely including expenses such as printers, cell phones, and other supplies, where working from home is necessary due to COVID-19;
- Medical expenses not reimbursed by insurance, and/or medical supplies including soap and hand sanitizer, related to COVID-19; and
- Funeral expenses associated with COVID-19.
Because this provision has been rarely used, practitioners don’t know the full extent of expenses it may be used to cover. There is likely a wide range of expenses that could fall within the exclusion.
What benefits are not covered by Section 139?
Payments are not excluded under Section 139 if they compensate employees for expenses that are covered by insurance or if they are intended to replace lost income.
Other limits and implications of Section 139?
- Significantly, and unlike most income exclusions in the tax code, there is no cap on the value of benefits that may be excluded from income under this provision. This means, for example, that the total value of childcare provided for employees whose children are out of school because of COVID-19 may be excluded from gross income. (Generally, absent this provision, employees may only exclude up to $5,000 per year in childcare benefits provided by an employer).
- Employers can likely deduct assistance payments under Section 139 as ordinary and necessary business expenses.
- Tax-free treatment can likely be effective as of March 13, the date on which the President declared that an emergency existed nationwide under the Robert T. Stafford Disaster Relief and Emergency Assistance Act.
Do employers need to establish a written Section 139 plan?
Maybe. Section 139 doesn’t set out any requirements itself, but the IRS has looked favorably on other arrangements intended to comply with Section 139 when the payments were made pursuant to a written program. This may also be protective for the employer as it can set forth eligibility, limits on benefits, etc. Therefore, it would be prudent for attorneys to advise clients to document disaster relief payments in a written program.
As this relief has not been used in the face of a pandemic before, though, there will be open questions that attorneys will need to navigate with little formal guidance.
Poyner Spruill partner Kelsey Mayo and associate Hannah Munn focus their practices on employee benefits and executive compensation. They can be reached at firstname.lastname@example.org and email@example.com.