When you think about businesses, the most important element that makes it work is the group of people that it is composed of. That is why when disasters happen, most employers understand that the best asset that they have is their employees.
Employers would want the best for them, but more often than not, they have a hard time, especially when you take into consideration laws like Section 102 of the U.S. tax code. This law does not allow employers to make cash “gifts” to their employees unless they are ready to pay for the gift’s undue tax burden. Because of this, employers are usually restricted when it comes to helping their employees during tough times.
Despite these setbacks, there is actually a way for employers to get a new avenue to support their employees whenever a large-scale emergency occurs, which is Section 139 of the IRS Tax Code.
What is Section 139?
This law was established in the wake of the 9/11 attacks. It was to help employers assist their employees by providing them tax-free payments. Thus, being able to circumnavigate around the income tax triggered by Section 102.
Section 139 will come into effect when the federal government declares that a qualified disaster has occurred. Under a situation that is deemed a qualified disaster, employers will be allowed to make contributions to their employees. This is to make sure that they can have access to the necessary resources that they need to get through the disaster. Aside from the support, Section 139 payments also have the benefit of being tax-deductible for employers.
How will it be declared a qualified disaster?
The deciding factor to make Section 139 effective is that the qualified disaster relief payments are considered “reasonable and necessary.” Under the law, the definition of qualified disaster relief payments specifically includes reimbursement or payment of “reasonable and necessary personal, family, living, or funeral expenses as incurred as a result of a qualified disaster.” One the one hand, it also explicitly excludes payments for employee wages and costs covered by insurance or other reimbursements. Other than those, Section 139 is worded broadly.
Because the definition is broad, it provides leeway for interpretation. This is because no two disasters are the same, which means that the definition of a reasonable and necessary qualified disaster relief payment may cover a wide range of costs. It could be public transportation costs, utilities, medical expenses not covered by insurance, and more.
The Downside of Section 139’s Broad Definition
Although it is open to interpretation, this vagueness can also be frustrating in certain aspects. It is important to note that it is not clear what happens once an emergency declaration has been lifted. Questions such as to whether the funds will still be tax-free or tax-deductible will arise, for instance.
One of the ways you can mitigate your concerns as an employer is to make use of documentation. Even though Section 139 requires little documentation, the Joint Committee on Taxation stated that:
“In addition, in light of the extraordinary circumstances surrounding a qualified disaster, it is anticipated that individuals will not be required to account 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.”
The statement does agree with the idea that documentation is not something that should be strictly followed. Still, as an employer, you should take note of the caveat that the payments should be “reasonably expected to be commensurate with the expenses incurred.” This means that employers should still document to show how they have achieved their reasonable expectations.
Thus, taking into account everything about Section 139, as an employer, you can still provide support to your employees when disasters strike. But, if it is difficult for you to make these decisions, it would be wise to talk with a CPA first. They can help you make the right choices and help clarify anything that is uncertain for you. These financial and legal experts will undoubtedly be knowledgeable about taxation and the laws.