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President Trump recently determined that the ongoing novel coronavirus (COVID-19) pandemic warranted a nationwide emergency declaration under the Robert T. Stafford Disaster Relief and Emergency Assistance Act (the Stafford Act), thereby opening up the opportunity for employers to provide tax-free assistance to employees under Section 139 of the Internal Revenue Code (Code).

Qualified Disaster Relief Payments

Section 139 provides that qualified disaster relief payments from any source reimbursing or paying an individual for certain expenses in connection with a qualified disaster1 are not subject to income or employment taxes (Social Security, Medicare and federal unemployment taxes). For this purpose, a qualified disaster relief payment includes any amount paid by an employer to or for the benefit of an employee to reimburse or pay “reasonable and necessary” personal, family, living, or funeral expenses incurred as a result of a qualified disaster. Qualified disaster relief payments, however, do not include: (i) payments for expenses that are otherwise paid for by insurance or other reimbursements; or (ii) income replacement payments, such as the payment of lost wages, lost business income, or unemployment compensation.

While the IRS has not issued specific guidance regarding the type of expenses that may be reimbursed tax-free in the context of a national pandemic (as compared to a natural disaster), the underlying purpose of Section 139 reasonably suggests that there are numerous categories of reimbursable expenses implicated by the COVID-19 pandemic, including:

  • Medical expenses not covered by insurance (e.g., co-pays, deductibles, over-the-counter medicines and cleaning supplies);
  • Expenses incurred for child care and tutoring services;
  • Expenses incurred to allow the employee to work from home (e.g., the cost of a personal computer, printer, supplies, internet service, etc.);
  • Commuting expenses;
  • Caregiver and domestic service expenses;
  • Funeral expenses; and
  • Legal and accounting expenses.

Fortunately, in light of the extraordinary circumstances surrounding a qualified disaster, the rules governing the implementation and administration of a qualified disaster relief program are intended to be simple and straightforward. More specifically, unlike the typical expense reimbursement arrangement:

  • Individuals are not required to account to their employer for 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;
  • Employers may provide assistance directly to employees or through a non-exempt fund established to receive contributions from the employer as well as employees;2
  • Payments are not required to be reported on a Form W-2 or Form 1099;
  • There is no specific limit on the amount of reimbursement that may be made to an employee, other than the requirement that the expense be reasonable and necessary; and
  • There is no requirement that the employer’s qualified disaster relief program be established in writing.

Notwithstanding this lack of formality, employers may find it advisable to establish a written program to assist in defining the key elements of the program as well as to facilitate communication of this additional benefit to employees. Key terms to address include the class of eligible employees; a listing of the type of expenses covered; limits or caps on the amount of reimbursable expenses (e.g., individual or maximum plan limits); the procedures by which to seek reimbursement; the contact information of the person(s) administering the program; and the length of the program. Additionally, employers should clearly reserve the right to modify, amend and/or terminate the program, in their sole discretion.

In light of the exigency and uncertainty caused by the COVID-19 pandemic, employers should look to Section 139 as a favorable and efficient mechanism to provide tax-free supplemental assistance to employees.

For more cutting-edge perspectives on the legal and business implications of COVID-19, visit our COVID-19 resource center.


  1. For purposes of Section 139, a qualified disaster includes a Presidentially declared disaster warranting federal assistance under the Stafford Act.
  2. Any donations by employees, however, would need to occur on an after-tax basis.