Qualified Disaster Relief Payments – Tax Free Payments to Employees
April 12, 2020
SC&H’s Key Takeaways
- Qualified disaster relief payments (QDR Payments) can be made by an employer to an employee(s) to reimburse for qualified disaster expenses
- QDR payments are tax-free to the receiving employee and are not subject to income or employment taxes
- QDR payments are fully tax deductible to the employer after a federally declared disaster is issued
In the past weeks, legislation has been flowing from Washington to provide opportunities for employers to aid their employees with the financial, medical, and family burdens of the ongoing pandemic. Among these new laws are the Families First Coronavirus Relief Act and the Coronavirus Aid, Relief, and Economic Security Act (CARES Act). These items of legislation have been widely discussed and analyzed. However, there is also a provision under IRC Section 139 that was already in place which might be worth exploring.
Section 139, which outlines qualified disaster relief payments (QDR payments), is applicable only when a federally declared disaster, as defined in Section 165(i)(5)(A), has been issued. Section 139 allows an employer to make tax-free payments to reimburse or pay employees for the following expenses:
- Reasonable and necessary personal, family, living, or funeral expenses incurred as a result of a qualified disaster
- Reasonable and necessary expenses incurred for the repair or rehabilitation of a personal residence (including a rented one) or to repair or replace its contents, if the work is needed due to a qualified disaster
QDR payments could be made to pay for:
- Medical expenses not compensated by insurance
- Other health-related expense, including hand sanitizer and OTC medication
- Funeral costs of an employee’s family
- Child care for workers whose normal child care option is unavailable
- Tuition expense for an employee’s child(ren)
- Telecommuting costs for those working from home
Under Section 162, QDR payments are fully tax deductible to the employer and are not subject to income or employment taxes by the receiving employees. The payments can be used to offset expenses that an employee incurred for which insurance has not compensated them.
Qualified disaster mitigation payments, which are made to lessen or avoid the effects of future disasters, are also excludable from income. However, QDR payments may not be wage replacements or for paid sick or family leave.
No formal written plan is required under the current regulations. However, it is highly recommended that documentation of an employer’s action taken be kept. This could include the type of expenses paid for, the method of payment, any employer-imposed limitations, and the start and end date of program. Payments can be made to any employee regardless of length of employment and there in no maximum amount allowed individually or in total.
SC&H Group’s Tax team continues to keep a close watch on updates as they take place. If you have any questions on how these changes apply to your organization, please reach out to our team today.