‘Qualified Disaster Relief Payments’ a Good Gift for Employees Affected by COVID-19

With the holidays fast approaching, many employers want to help their employees who’ve been hit hardest by COVID-19. And there might be a tax-free option for them to do so.

In section 139 of the Internal Revenue Code, you’ll find the terms “qualified disaster” and “qualified disaster relief payments.”

For a disaster to be a “qualified” one, the president has to declare that the situation warrants help from the federal government. Earlier this year, President Donald Trump declared the nationwide COVID-19 pandemic as such.

So, a “qualified disaster relief payment” is any amount an individual is paid that reimburses or covers personal, family, living, or funeral expenses that the disaster caused. In this case, those costs would need to be related to COVID-19.

What’s nice about a qualified disaster relief payment is that it’s tax deductible for you as an employer and doesn’t count as an employee’s wages.

Wages don’t count as qualified disaster relief payments, so anything you pay to an employee would have to be above and beyond their paycheck. That applies even if you’re paying an employee who can’t work because they’ve been affected by COVID-19.

What Kinds of Costs Are Allowed?

The IRS hasn’t yet issued much guidance about qualified disaster relief payments related to COVID-19. But if we look back at previous qualified disasters — hurricanes, floods, fires, etc. — the IRS has allowed costs related to:

• Medical expenses, e.g., costs related to urgent care visits or medications to combat COVID’s symptoms.
• Meals, e.g., delivery fees for groceries or food from restaurants because an employee has to quarantine because of a COVID exposure.
• Lodging or temporary housing, e.g., expenses for alternative lodging because an employee’s family member was diagnosed with COVID, and they’re trying to limit their exposure.
• Travel and transportation, e.g., costs that an employee might incur finding alternate transportation because they’re avoiding public transit.
• Funeral expenses, e.g., expenses related to the funeral costs if an employee’s loved one died because of COVID.

It’s not an exhaustive list and could also include costs related to items like face masks, hand sanitizer, and gloves. If you need help determining if a payment would qualify as a relief payment, please let us know.

What Expenses Are Not Covered?

In addition to wages — which include sick leave — you’ll want to avoid paying your employees for nonessential, luxury, or decorative services and items. Also, you can’t pay for something your employee’s insurance covers.

How Do the Payments Work?

You could reimburse your employees on an expense-by-expense basis, or you could provide them with a lump sum to cover costs they’ve incurred or expect to incur. You can make those payments directly to the employee through their paycheck, through a donor-advised fund, or through a private foundation.

You don’t have to collect any receipts from your employees, and there’s no other documentation required either. Make sure to have a policy in place that outlines what kinds of expenses you’ll pay for and any other restrictions you want to include.

You can make qualified disaster relief payments until the president declares that COVID-19 is no longer a qualified disaster, which is — right now — at least through the end of the year.

If you have questions about paying employees during a pandemic or any other payroll questions, we’re here to help.

This communication is intended to provide general information on legislative COVID-19 relief measures as of the date of this communication and may reference information from reputable sources. Although our firm has made every reasonable effort to ensure that the information provided is accurate, we make no warranties, expressed or implied, on the information provided. As legislative efforts are still ongoing, we expect that there may be additional guidance and clarification from regulators that may modify some of the provisions in this communication. Some of those modifications may be significant. As such, be aware that this is not a comprehensive analysis of the subject matter covered and is not intended to provide specific recommendations to you or your business with respect to the matters addressed.