Disaster Relief Payments—Tax-Efficient Assistance to Employees Impacted by Covid-19

President Trump’s national emergency declaration on March 13 triggered tax code Section 139, which allows employers to exclude disaster assistance payments from employees income.

Tax code Section 139 enables employers to make non-taxable qualified disaster relief payments to employees for reasonable and necessary expenses resulting from the coronavirus pandemic.

Generally, payments made by an employer to, or for the benefit of, an employee must be included in the employee’s gross income under Section 61 and cannot be treated as a nontaxable gift under Section 102(c). Prior to the enactment of Section 139, various types of disaster payments made to individuals have been excluded from gross income under a general welfare principle, but no specific statutory exclusion was available for disaster payments from employers to employees.

Section 139 was enacted in the aftermath of the September 11 terrorist attacks. When triggered, it overrides the broad income inclusion principles of Section 61 and allows employers to provide direct financial assistance to employees impacted by a qualified disaster without adverse tax consequences.

Defining a Qualified Disaster
Most advisers understandably focus on Section 139’s application to losses incurred as a result of terrorist attacks and natural disasters such as hurricanes, tornadoes, wildfires, and flooding. However, Section 139(c)’s gatekeeping requirements are much broader and were triggered on March 13, 2020, when President Donald Trump declared a national emergency under the Robert T. Stafford Disaster Relief and Emergency Assistance Act due to the spread of the coronavirus. Employers may now provide tax-favored financial assistance to employees who are affected by the coronavirus.

Reimbursable Expenses
Reinbursable expenses associated with the coronavirus may take many different forms, such as:

Unreimbursed medical expenses including co-pays, deductibles, vitamins, and supplements
Increased expenses associated with being quarantined at home (e.g., increased utilities and home office expenses, as discussed below)
Expenses associated with setting up or maintaining a home office such as enhanced internet connections, computer monitors, laptops, printers, office supplies, etc. (even if such expenses would not otherwise satisfy the home office deduction requirements)
Housing for additional family members, (e.g., transportation and living expenses for college students returning home including duplicative meal expenses)
Nonperishable food purchases/reserves
Increased childcare expenses
Expenses to enhance mental health and physical well-being from social distancing such as meditation apps and home health fitness
Alternative commuting means in lieu of mass transit

Nonreimbursable Expenses
Three broad categories of nonreimbursable expenses are:

Payments for expenses that are not reasonable and necessary
Payments that constitute an income replacement program (i.e., a payment for lost wages, lost business income, or unemployment benefits)
Payments that are reimbursed or reimbursable by insurance or otherwise
No Expense Substantiation
Due to the extraordinary circumstances surrounding a qualified disaster, employees are not required to account for or substantiate 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. Significantly, the reasonable belief provisions found in Subtitle C of the tax code do not apply to Section 139 payments; however, Section 139’s reasonableness provisions and the lack of a substantiation requirement have much the same effect as the reasonable belief provisions.

No Dollar Limit
Section 139 does not impose a dollar limit. An employer could provide an affected employee with a six-figure payment as long as the expenses in question are reasonable and necessary with respect to the coronavirus.

No Discrimination Testing
Payments are not subject to discrimination testing. Unlike various Section 132 provisions, Section 139 does not impose any discrimination rules under Section 139.

No Payroll Taxes or Reporting
Qualified disaster relief payments are excluded from gross income and wages for payroll tax purposes. In addition to being exempt from payroll taxes, such payments are not subject to information reporting on either Forms W-2 or Forms 1099-MISC.

No Deduction Limitations
Qualified disaster relief payments should be fully deductible. Even though the payments are neither taxable wages nor gross income, employers may reasonably take the position that the payments remain fully deductible to the same extent that they would have been if they were otherwise included in gross income or taxable wages. However, Section 139(h) denies “double benefits” with the likely result that self-employed individuals and other owner-employees may find their tax deductions limited if they are actually a recipient of a qualified disaster relief payment.

Cash Advances and Reimbursements
Although some tax advisers believe that qualified tax relief payments only apply to reimbursements, the better position is that Section 139 also encompasses cash advances to pay for covered expenses that the employer reasonably expects the employee to incur.

Section 132 Fringe Benefit Rules
Section 139 should override the provisions of Section 132 (regarding fringe benefits) to the extent that the provisions might otherwise cover the same payment.

Plan Documentation
A written plan document is not required or recommended. Nevertheless, given the benefits of tax-free status for qualified disaster relief payments, employers consider adopting an administrative system that validates such payments meet the Section 139 requirements. Such a system can include an application form and an affirmative statement from the employee that the requested funds are necessary for expenses associated with the coronavirus and confirms that such expenses are not reimbursable by insurance.

Audit Outlook
The IRS is not likely to audit a program that clearly limits payments to reasonable and necessary payments incurred as a result of the coronavirus. Similarly, although the vast majority of states follow the federal exclusion by defining state taxable income with reference to an individual’s federal taxable income, in the handful of states where a technical reporting requirement may exist for qualified disaster relief payments, we have not encountered any adverse audits that refuse to extend the same treatment at the state level.

Summary
Section 139 qualified disaster relief payments may be the most generous and easily administered of the various employee benefits provisions found in the tax code. In addition to some of the most favorable income and employment tax treatment of any provision of the tax code, the reasonableness provisions, the broad nature of reimbursable expenses, and the lack of any onerous substantiation requirement necessarily make Section 139 payments the first benefit that any employer should examine when trying to respond to the adverse financial impact that the coronavirus has on its employees.

David Fuller and Rick Stepanovic of McDermott, WIll & Emery/Bloomberg March 27, 2020

Qualifying health plan expenses may result in larger employment tax credits under the FFCRA and the CARES Act

Both the Families First Coronavirus Response Act (the FFCRA) and the Coronavirus Aid, Relief, and Economic Security (CARES) Act provide for payroll tax credits for the payment of certain employee wages until Dec. 31, 2020. Under both laws, the amount of these wages include "qualifying health plan expenses," which may result in a larger payroll tax credit.

Under the FFCRA, an employer is typically eligible for a fully refundable payroll tax credit that is equal to the qualified sick leave wages and the qualified family leave wages, plus allocable qualified health plan expenses paid between April 1, 2020 and Dec. 31, 2020.

Under the CARES Act, an employer whose operations is fully or partially suspended may be eligible for a payroll tax credit up to 50 percent of the wages paid (up to $10,000) between March 12, 2020 and Jan. 1, 2021. Again, these wages include allocable qualified health plan expenses.

Employers may offset the amount of their anticipated payroll tax credits under the FFCRA and the CARES Act against their deposit of employment taxes (including income tax withholdings) with the IRS. Since many employers are required to make these deposits with the IRS on a semi-weekly basis, employers should start determining their qualified health plan expenses as soon as possible.

Technical Jargon

Both the FFCRA and the CARES Act include the following provisions:

That the amount of the credit (under the FFCRA) or the amount of qualified wages (under the CARES Act) includes the employer's allocable "qualified health plan expenses.")
"Qualified health plan expenses" means "amounts paid or incurred by the employer to provide and maintain a group health plan (as defined in the Internal Revenue Code), but only to the extent that such amounts are excluded from the gross income of employees by reason of section 106(a) of the code.
The FFCRA and the CARES Act direct the Secretary of the Treasury to prescribe how qualified health plan expenses are allocated but also state that, "[e]xcept as otherwise provided by the Secretary, such allocation shall be treated as properly made if made on the basis of being pro rata among employees and pro rata on the basis of periods of coverage (relative to the periods such wages relate)."

Practical Advice

The provisions related to determining qualified health plan expenses for purposes of claiming payroll tax credits under either the FFCRA or the CARES Act are difficult to interpret. The following sections break these provisions down so that they are better understood. The first step is to determine which health plan expenses are eligible for a payroll tax credit. The second step is to allocate these expenses to the appropriate employees.

Eligible Health Plans

A "group health plan" under the Internal Revenue Code includes all plans that are subject to the continuation of coverage requirements under COBRA. As a result, the following employer-sponsored plans are included for purposes of determining the payroll tax credit under both the FFCRA and the CARES Act:

Medical/prescription drugs.
Dental.
Vision.
Medical flexible spending accounts (medical FSAs).
Health reimbursement arrangements (HRAs), except for qualified small employer HRAs (QSHRAs).
Employee assistance plans (other than referral-only EAPs).
Onsite medical clinics.
Eligible Expenses

Expenses incurred as a result of providing one of the above group health plans are only included for purposes of determining the payroll tax credit under the FFCRA and the CARES Act to the extent these amounts are excluded from the gross income of employees under the tax code. This includes amounts paid by the employer. It also includes amounts that are paid by employees through pretax salary reductions under a Section 125 Cafeteria plan. Amounts paid by employees on an after-tax basis, such as COBRA premiums, are not included for purposes of determining the payroll tax credit.

Allocating Expenses

The IRS issued a series of FAQs regarding the payroll tax credits under the FFCRA. The IRS also issued FAQs on the payroll tax credits under the CARES Act, but those FAQs don't address qualified health plan expenses. Since the statutory provision regarding the allocation of qualified health plan expenses is the same under the FFCRA and the CARES Act, it appears reasonable that the FAQs on how to allocate these expenses under the FFCRA would apply equally to the CARES Act.

Fully Insured Group Health Plans

The IRS's FAQs give the following three allocation methods with respect to fully insured group health plans:

The COBRA applicable premium for the employee typically available from the insurer (while the FAQs are silent on this, we do not recommend including the 2 percent administrative fee).
One average premium rate for all employees.
A substantially similar method that takes into account the average premium rate determined separately for employees with self-only and other than self-only coverage.
The FAQs only give an example of the second allocation method. Here is that example:

An Eligible Employer sponsors an insured group health plan that covers 400 employees, some with self-only coverage and some with family coverage. Each employee is expected to have 260 work days a year. (Five days a week for 52 weeks.) The employees contribute a portion of their premium by pre-tax salary reduction, with different amounts for self-only and family. The total annual premium for the 400 employees is $5.2 million. (This includes both the amount paid by the Eligible Employer and the amounts paid by employees through salary reduction.)

For an Eligible Employer using one average premium rate for all employees, the average annual premium rate is $5.2 million divided by 400, or $13,000. For each employee expected to have 260 work days a year, this results in a daily average premium rate equal to $13,000 divided by 260 or $50. That $50 is the amount of qualified health expenses allocated to each day of paid sick or family leave per employee.

Self-Insured Group Health Plans

With respect to self-insured group health plans, the FAQs give the following two allocation methods:

The COBRA applicable premium for the employee typically available from the administrator (again, while the FAQs are silent on this, we do not recommend including the 2 percent administrative fee).

Any reasonable actuarial method to determine the estimated annual expenses of the plan.

The FAQs do not, however, give any examples of the allocation methods for self-insured group health plans.

Exerpt from SHRM Artcile by: Tripp VanderWal © Miller Johnson
April 23, 2020

Carrier Links to On-Line Physician Visits

Below is a list of carriers and links to their respective on-line physician access to meet with a doc in the comfort of your own home.  With an expanded list of illness’ they are able to diagnose, treat and prescribe medications for, it’s one more way to keep you out of harm’s way.  In addition they will send the RX directly to your pharmacy. 

Carefirst: Video Visit

United Healthcare: Virtual Visits

Aetna: Telemedicine

Cigna: Telehealth

Kaiser Permanente: Video Visit

Hope you all are well.  And please share the link with your employees, familes, friends.

Thanks,

Ben