PLANSPONSOR - April/May 2020 - 50

ERISA EXAMINATION
New Benefits
For the 'Disaster'
IRC Section 139 provides expanded relief for affected employees
W
e typically focus this column on employee benefit
committees and their fiduciary responsibilities. But,
in light of the COVID-19 pandemic, we thought it
would be helpful to write about a little-known Internal Revenue
Code (IRC) provision. Clients have been calling and asking how
they can help or provide new benefits to employees who are
struggling with issues created by the pandemic. IRC Section
139, added after the 9/11 terrorist attacks, allows an employer to
provide, tax-free, to its employees certain benefits or reimbursements
for expenses that would normally be taxable to them.
Qualified Disaster Relief Payments
When President Donald J. Trump declared the COVID-19
pandemic a " disaster " under the Stafford Act, on March 13,
he triggered the availability of Section 139. To receive favorable
tax treatment, any payment an employer makes to help
a worker affected by COVID-19 must be a " qualified disaster
relief payment. " This includes payments for " reasonable and
necessary personal, family, living or funeral expenses incurred
as a result of a qualified disaster, " as long as the expense is not
otherwise compensated for by insurance or other means.
Based on IRS Revenue Ruling 2003-12 and the committee
report issued by the Joint Committee on Taxation when Section
139 was added to the tax code, qualifying expenses might be:
rent, water, utilities and other expenses of maintaining a household;
travel away from home, including transportation, meals
and lodging; medical expenses that would be deductible under
IRC Section 213; and child care expenses.
Qualified disaster relief payments are excluded from gross
income and are not subject to federal income tax, FICA [Federal
Insurance Contributions Act] or FUTA [Federal Unemployment
Tax Act] withholding. Thus, the employee need not report them
as income on his W-2 or a 1099 form. Employers will be pleased
to know they may claim a federal tax deduction for the payments.
But Section 139 applies only to tax treatment under federal law.
Whether similar state tax treatment applies will vary by state.
IRC Section 139 imposes no requirements for recordkeeping
or for substantiation that the payments were for qualifying
expenses. The legislative history indicates that Congress
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
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Art by Joseph Ciardiello
be commensurate with the expense incurred. "
In its only guidance addressing Section 139 benefits, the IRS
confirmed this intent, noting that it will not require any substantiation
of payments and expenses incurred by individual recipients.
That being said, employers should consider maintaining adequate
records of such payments, to serve as proof of any deduction taken.
Other Rules to Consider
Employers thinking about providing benefits under Section 139
should factor in the following points:
* State income and state unemployment tax may apply to
payments made under this type of program.
* The Employee Retirement Income Security Act (ERISA)
and most of the other typical legal rules governing employee
benefit arrangements do not apply.
* There are no nondiscrimination rules or dollar limits on the
amount an employee may be reimbursed, as long as it is reasonable
and necessary to meet the expense incurred due to the disaster.
* Although no formal plan document is required, employers
may consider developing a policy document that explains various
aspects of the program such as the eligible employee group; the
types of expenses the employer will reimburse; how the benefits
will be provided-e.g., whether workers must apply and whether
the employer will pay the expense directly or require the person
to submit receipts for reimbursement; any employer-imposed
expense limit per employee; and the program's start and end date.
* Any amounts paid to or on behalf of an employee must not
be reimbursable by insurance or other similar form of compensation
and should not include nonessential services or items.
We would expect that Section 139 payments will be
excluded from the definition of compensation for purposes of
401(k) and most other retirement plans, but we recommend
employers confirm that before making the payments.
The COVID-19 pandemic designation as a disaster has
brought IRC Section 139 out of the shadows and into the light
as a way that employers can offer to cover disaster-related costs
to employees.
Summer Conley is a partner in the Los Angeles office of Faegre
Drinker Biddle & Reath LLP. Michael Rosenbaum is a partner
in the firm's Chicago office. Elise Norcini, an associate in the
Chicago office, contributed to this column.
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