While the full brunt of the coronavirus still hasn’t smacked the U.S. economy, employers are already examining tax-advantaged hardship assistance programs to support workers facing significant health and financial challenges due to the emergency.
Employers are contacting tax advisers to discuss strategies for structuring programs that grant cash to employees under tax code Section 139, regarding disaster relief payments. Businesses are also contacting charitable organizations for help creating crisis funds, which permit employers to make tax-deductible donations and employees to collect emergency grants tax free, said Ruth Madrigal, a principal and leader of KPMG LLP’s exempt organizations group.
America’s Charities, a nonprofit that helps businesses establish and administer charities and tax-advantaged employee assistance funds (EAFs), has been deluged with calls for advice since President Donald Trump declared the coronavirus outbreak a national emergency March 13.
“A lot of companies have either ramped up their existing employee assistance funds or they are exploring how to actually create one to help their employees or others who rely on them for work,” said James Starr, president and chief executive officer of America’s Charities.
Payments provided by employers to workers are generally regarded as taxable compensation, but Section 139 offers special treatment when a federal “qualified disaster” has been declared. Specifically, employers are permitted to provide qualified disaster relief payments (QDRPs), which are not considered taxable income for the employee. In addition, employers can claim a deduction on such emergency payments, said Robert Delgado, a principal in KPMG’s compensation and benefits practice.
Section 139 permits employers to provide tax-free assistance “to reimburse or pay reasonable and necessary personal, family, living, or funeral expenses incurred as a result of a qualified disaster.” But Delgado said such qualified relief payments don’t cover expenses that would be later reimbursed by insurance, income replacement for lost wages, and assistance for hardships that aren’t related to the declared disaster.
Dimensions of Coronavirus Uncertain
In the context of the coronavirus epidemic, Delgado said such qualified payments can be structured to support workers for unreimbursed medical expenses, child care, telecommuting and other unusual expenses resulting from the public health crisis. That said, some employers may have a hard time crafting their hardship assistance programs because the statutory language is vague and the dimensions of the crisis are uncertain.
“The challenge is, unlike a physical disaster where you may have very specific expenses you can identify, both the duration and the quantum of the pandemic are evolving and evolving all the time,” Delgado said. “That’s difficult to capture.”
Employers don’t have good precedents to consider as they think about a coronavirus program, Madrigal said.
Section 139 is generally used during hurricanes and earthquakes, but the provision was used by some employers in 2014 in response to the Ebola virus outbreak. The Internal Revenue Service issued guidance, Notice 2014-65, responsive to the emergency. But the relief was limited to employers with personnel in the West African nations of Guinea, Liberia, and Sierra Leone. Coronavirus, Madrigal noted, has huge domestic and international implications, touching almost every employer.
Madrigal, who served as a senior attorney in the Treasury Department’s Office of Tax Policy during the Obama Administration, said she is not expecting the government to provide coronavirus guidance anytime soon.
“I’m not holding my breath,” she said. “There are a lot of things Treasury has to do right now.”
Indirect Charitable Assistance
Delgado and Madrigal said businesses may consider providing indirect assistance through an employer-sponsored private foundation, or an unrelated charitable organization operating an employee assistance fund for the employer. Both options provide certain tax benefits. The EAFs carry the added advantage of granting the broader workforce opportunities to make tax-deductible contributions to relief campaigns for their coworkers.
The IRS imposes certain rules on such giving to ensure programs operate for viable charitable purposes. Delgado and Madrigal said the foundation or charity must: define a broad charitable class; create an objective process for the determination of need; and, provide assistance through an independent selection committee.
AmerisourceBergen Corp., which distributes pharmaceuticals, health supplies and equipment to hospitals and pharmacies across the country, established an assistance fund in 2012 to support its 20,000 employees during natural disasters and family tragedies. The Chesterbrook, Penn.-based company is adapting its Associate Assistance Fund for needs linking to the coronavirus crisis and plans to match all employee donations to the charity.
“In addition to continuing to support AmerisourceBergen associates who are facing financial challenges due to more traditional events, the AAF will also be offering funding for those impacted by COVID-19 related events,” spokeswoman Lauren Esposito said in an emailed message. “This can include if an associate or immediate family member has contracted Coronavirus (COVID-19) and experiences broad financial hardship, or in the most catastrophic circumstance, if an associate or immediate family member passes away due to the Coronavirus (COVID-19) and they need support for funeral expenses.”
Flexibilty for Employers
Starr noted, however, that the assistance models under Section 139 and an EAF are fundamentally different.
While Section 139 is designed to respond to declared emergencies, EAFs can provide aid both during a disaster and at any time when workers are coping with unexpected hardships. In this regard, EAFs can function as an employer’s continuous tool for helping workers through emergencies such as house fires, catastrophic illnesses and deaths in a family.
“Employee assistance funds are not there to replace lost income dollar for dollar,” Starr said. “These funds address a financial hardship situation that may have been created by a loss of income. It’s there for paying the rent, or the mortgage, or the utility bill, or other expenses a family is going to struggle to meet.”
Structuring a crisis fund through an independent public charity offers employers certain advantages, Starr said. Organizations such as America’s Charities can reduce an employer’s operational expenses and mitigate certain risks by performing all administrative functions, including program design, processing applications, distributing assistance, and complying with all regulations.