Bloomberg Tax
March 27, 2020, 1:01 PM

INSIGHT: Disaster Relief Payments—Tax-Efficient Assistance to Employees Impacted by Covid-19

David Fuller
David Fuller
McDermott Will & Emery
Rick Stepanovic
Rick Stepanovic
McDermott Will & Emery

Tax code Section 139 enables employers to make non-taxable qualified disaster relief payments to employees for reasonable and necessary expenses resulting from the coronavirus pandemic.

Generally, payments made by an employer to, or for the benefit of, an employee must be included in the employee’s gross income under Section 61 and cannot be treated as a nontaxable gift under Section 102(c). Prior to the enactment of Section 139, various types of disaster payments made to individuals have been excluded from gross income under a general welfare principle, but no specific statutory exclusion was available for disaster payments from employers to employees.

Section 139 was enacted in the aftermath of the September 11 terrorist attacks. When triggered, it overrides the broad income inclusion principles of Section 61 and allows employers to provide direct financial assistance to employees impacted by a qualified disaster without adverse tax consequences.

Defining a Qualified Disaster

Most advisers understandably focus on Section 139’s application to losses incurred as a result of terrorist attacks and natural disasters such as hurricanes, tornadoes, wildfires, and flooding. However, Section 139(c)’s gatekeeping requirements are much broader and were triggered on March 13, 2020, when President Donald Trump declared a national emergency under the Robert T. Stafford Disaster Relief and Emergency Assistance Act due to the spread of the coronavirus. Employers may now provide tax-favored financial assistance to employees who are affected by the coronavirus.

Reimbursable Expenses

Reinbursable expenses associated with the coronavirus may take many different forms, such as:

  • Unreimbursed medical expenses including co-pays, deductibles, vitamins, and supplements
  • Increased expenses associated with being quarantined at home (e.g., increased utilities and home office expenses, as discussed below)
  • Expenses associated with setting up or maintaining a home office such as enhanced internet connections, computer monitors, laptops, printers, office supplies, etc. (even if such expenses would not otherwise satisfy the home office deduction requirements)
  • Housing for additional family members, (e.g., transportation and living expenses for college students returning home including duplicative meal expenses)
  • Nonperishable food purchases/reserves
  • Increased childcare expenses
  • Expenses to enhance mental health and physical well-being from social distancing such as meditation apps and home health fitness
  • Alternative commuting means in lieu of mass transit

Nonreimbursable Expenses

Three broad categories of nonreimbursable expenses are:

  • Payments for expenses that are not reasonable and necessary
  • Payments that constitute an income replacement program (i.e., a payment for lost wages, lost business income, or unemployment benefits)
  • Payments that are reimbursed or reimbursable by insurance or otherwise

No Expense Substantiation

Due to the extraordinary circumstances surrounding a qualified disaster, employees are not required to account for or substantiate actual expenses in order to qualify for the exclusion, provided that the amount of the payments can be reasonably expected to be commensurate with the expenses incurred. Significantly, the reasonable belief provisions found in Subtitle C of the tax code do not apply to Section 139 payments; however, Section 139’s reasonableness provisions and the lack of a substantiation requirement have much the same effect as the reasonable belief provisions.

No Dollar Limit

Section 139 does not impose a dollar limit. An employer could provide an affected employee with a six-figure payment as long as the expenses in question are reasonable and necessary with respect to the coronavirus.

No Discrimination Testing

Payments are not subject to discrimination testing. Unlike various Section 132 provisions, Section 139 does not impose any discrimination rules under Section 139.

No Payroll Taxes or Reporting

Qualified disaster relief payments are excluded from gross income and wages for payroll tax purposes. In addition to being exempt from payroll taxes, such payments are not subject to information reporting on either Forms W-2 or Forms 1099-MISC.

No Deduction Limitations

Qualified disaster relief payments should be fully deductible. Even though the payments are neither taxable wages nor gross income, employers may reasonably take the position that the payments remain fully deductible to the same extent that they would have been if they were otherwise included in gross income or taxable wages. However, Section 139(h) denies “double benefits” with the likely result that self-employed individuals and other owner-employees may find their tax deductions limited if they are actually a recipient of a qualified disaster relief payment.

Cash Advances and Reimbursements

Although some tax advisers believe that qualified tax relief payments only apply to reimbursements, the better position is that Section 139 also encompasses cash advances to pay for covered expenses that the employer reasonably expects the employee to incur.

Section 132 Fringe Benefit Rules

Section 139 should override the provisions of Section 132 (regarding fringe benefits) to the extent that the provisions might otherwise cover the same payment.

Plan Documentation

A written plan document is not required or recommended. Nevertheless, given the benefits of tax-free status for qualified disaster relief payments, employers consider adopting an administrative system that validates such payments meet the Section 139 requirements. Such a system can include an application form and an affirmative statement from the employee that the requested funds are necessary for expenses associated with the coronavirus and confirms that such expenses are not reimbursable by insurance.

Audit Outlook

The IRS is not likely to audit a program that clearly limits payments to reasonable and necessary payments incurred as a result of the coronavirus. Similarly, although the vast majority of states follow the federal exclusion by defining state taxable income with reference to an individual’s federal taxable income, in the handful of states where a technical reporting requirement may exist for qualified disaster relief payments, we have not encountered any adverse audits that refuse to extend the same treatment at the state level.


Section 139 qualified disaster relief payments may be the most generous and easily administered of the various employee benefits provisions found in the tax code. In addition to some of the most favorable income and employment tax treatment of any provision of the tax code, the reasonableness provisions, the broad nature of reimbursable expenses, and the lack of any onerous substantiation requirement necessarily make Section 139 payments the first benefit that any employer should examine when trying to respond to the adverse financial impact that the coronavirus has on its employees.

This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.

Author Information

David Fuller is counsel and Rick Stepanovic is an associate at McDermott Will & Emery in Washington.