The landscape for employers has been changing quickly in the wake of COVID-19. Many employers are adapting to new ways of working and looking for ways to support employees with living and working through the COVID-19 emergency. While we are waiting for legislative relief on certain fronts, employers should be heartened to learn of a form of federal relief that already exists and is available immediately—the ability to provide employees with tax-free benefits to cover certain COVID-19-related expenses under Code Section 139!
What benefits may be provided under Code Section 139?
Code Section 139 provides that individuals may exclude “qualified disaster relief payments” from gross income. These include amounts paid to reimburse or cover reasonable and necessary “personal, family, living, or funeral expenses” incurred as a result of a qualified disaster such as COVID-19.
So, what do these expenses include? There isn’t much guidance here, but the exclusion likely includes amounts paid by employers to employees to cover:
- Childcare or tutoring expenses where schools are closed due to COVID-19 (or, for employers such as hospitals and other first responder agencies, where parent-employees must work extended hours for COVID-19 relief).
- Working from home expenses, likely including expenses such as printers, cell phones, and other supplies, where working from home is necessary due to COVID-19;
- Medical expenses not reimbursed by insurance, and/or medical supplies including soap and hand sanitizer, related to COVID-19; and
- Funeral expenses associated with COVID-19.
Because this Code provision has been rarely used, practitioners don’t know the full extent of expenses it may be used to cover. There is likely a wide range of expenses that could fall within the exclusion.
What benefits are not covered by Code Section 139?
Payments are not excluded under Code Section 139 if they compensate employees for expenses that are covered by insurance or if they are intended to replace lost income.
Other limits and implications of Code Section 139?
- Significantly, and unlike most income exclusions in the Code, there is no cap on the value of benefits that may be excluded from income under this provision. This means, for example, that the total value of childcare provided for employees whose children are out of school because of COVID-19 may be excluded from gross income. (Generally, absent this provision, employees may only exclude up to $5,000 per year in childcare benefits provided by an employer).
- Employers can likely deduct assistance payments under Code Section 139 as ordinary and necessary business expenses.
- Tax-free treatment can likely be effective as of March 13th, the date of the President’s letter declaring COVID-19 an emergency under the Stafford Act.
Do employers need to establish a written Code Section 139 plan?
Maybe. Code Section 139 doesn’t set out any requirements itself, but the IRS has looked favorably on other arrangements intended to comply with 139 when the payments were made pursuant to a written program. This may also be protective for the employer as it can set forth eligibility, limits on benefits, etc. Therefore, it would be prudent to document disaster relief payments in a written program.
As this relief has not been used in the face of a pandemic before, there will be open questions that employers will need to navigate with little formal guidance. As always, we’d recommend consulting with an experienced benefits attorney before putting such a plan in place.
 Though there was some initial uncertainty, it now seems relatively clear that COVID-19 is a “qualified disaster” within the meaning of Code Section 139. As defined in Code Section 139, the term “qualified disaster” includes “a federally declared disaster (as defined by Code Section 165(i)(5)(A)).” Code Section 165(i)(5)(A) provides that the term “federally declared disaster” means any disaster subsequently determined by the President of the United States to warrant assistance by the Federal Government under the Robert T. Stafford Disaster Relief and Emergency Assistance Act. In a March 13, 2020 letter, President Trump stated: “I hereby determine, under section 501(b) of the Stafford Act, that an emergency exists nationwide.” He also stated that “after careful consideration, I believe that the disaster is of such severity and magnitude nationwide that requests for a declaration of a major disaster as set forth in section 401(a) of the Stafford At may be appropriate.” In a June 28, 2019 Office of Chief Counsel IRS Memorandum, the IRS provides that “[a] Federally declared disaster includes a major disaster declaration under section 401 of the Stafford act and an emergency declaration under section 501 of the Stafford Act.” Perhaps most importantly, the IRS has already taken the position that COVID-19 is a federally declared disaster under Code Section 165(i)(5)(A). In Notice 2020-17, the IRS supports extension of the tax filing deadline under Code Section 7508A(a) in light of COVID-19 through application of Code Section 165(i)(5)(A).