Skip to main content

Nixon Peabody LLP

  • People
  • Capabilities
  • Insights
  • About
Trending Topics
    • People
    • Capabilities
    • Insights
    • About
    • Locations
    • Events
    • Careers
    • Alumni
    Practices

    View All

    • Affordable Housing
    • Community Development Finance
    • Corporate & Finance
    • Cybersecurity & Privacy
    • Entertainment & Media
    • Environmental
    • Franchising & Distribution
    • Government Investigations & White Collar Defense
    • Healthcare
    • Intellectual Property
    • International Services
    • Labor, Employment, and Benefits
    • Litigation
    • Private Wealth & Advisory
    • Project Finance
    • Public Finance
    • Real Estate
    • Regulatory & Government Relations
    Industries

    View All

    • Aviation
    • Cannabis
    • Consumer
    • Energy
    • Financial Services
    • Healthcare
    • Higher Education
    • Infrastructure
    • Manufacturing
    • Nonprofit Organizations
    • Real Estate
    • Sports & Stadiums
    • Technology
    Value-Added Services

    View All

    • Alternative Fee Arrangements

      Developing innovative pricing structures and alternative fee agreement models that deliver additional value for our clients.

    • Continuing Education

      Advancing professional knowledge and offering credits for attorneys, staff and other professionals.

    • Crisis Advisory

      Helping clients respond correctly when a crisis occurs.

    • DEI Strategic Services

      Providing our clients with legal, strategic, and practical advice to make transformational changes in their organizations.

    • eDiscovery

      Leveraging law and technology to deliver sound solutions.

    • Environmental, Social, and Governance (ESG)

      We help clients create positive return on investments in people, products, and the planet.

    • Global Services

      Delivering seamless service through partnerships across the globe.

    • Innovation

      Leveraging leading-edge technology to guide change and create seamless, collaborative experiences for clients and attorneys.

    • IPED

      Industry-leading conferences focused on affordable housing, tax credits, and more.

    • Legal Project Management

      Providing actionable information to support strategic decision-making.

    • Legally Green

      Teaming with clients to advance sustainable projects, mitigate the effects of climate change, and protect our planet.

    • Nixon Peabody Trust Company

      Offering a range of investment management and fiduciary services.

    • NP Capital Connector

      Bringing together companies and investors for tomorrow’s new deals.

    • NP Second Opinion

      Offering fresh insights on cases that are delayed, over budget, or off-target from the desired resolution.

    • NP Trial

      Courtroom-ready lawyers who can resolve disputes early on clients’ terms or prevail at trial before a judge or jury.

    • Social Impact

      Creating positive impact in our communities through increasing equity, access, and opportunity.

    • Women in Dealmaking

      We provide strategic counsel on complex corporate transactions and unite dynamic women in the dealmaking arena.

    1. Home
    2. Insights
    3. Alerts
    4. Tax-free disaster relief payment plans for employees: What employers need to know

      Alerts

    Alert / Benefits

    Tax-free disaster relief payment plans for employees: What employers need to know

    March 25, 2020

    LinkedInX (Twitter)EmailCopy URL

    By Jenny Holmes and Kenneth Silverberg

    With the spread of COVID-19, employers and employees are seeking solutions to the recent financial difficulties that have resulted from the pandemic. Section 139 disaster relief payment plans are a viable solution during these uncertain times.

    DOWNLOAD

    PDF: Tax-free disaster relief payment plans

    As the COVID-19 (coronavirus) pandemic spreads, it will continue to adversely impact our personal and professional lives. Employees and their families are facing unprecedented financial insecurity due to reductions in hours, furloughs, layoffs, and increased expenses resulting from new medical, childcare, transportation, and living expenses. Employers are seeking solutions to assist employees and their families who have been, and will be, financially impacted by the pandemic.

    One type of immediate financial assistance employers can provide is a cash payment through a qualified Section 139 disaster relief payment plan.

    Qualified disaster relief payments are exempt from federal and most states’ personal income tax for the recipient and exempt from tax withholding, FICA, FUTA, Medicare, and self-employment taxes for all parties if structured properly.  Further, qualifying payments are still deductible business expenses for the employer, even though they are not taxable to the recipients. The following summary provides an overview of the rules governing employer-provided disaster relief payments and several specific types of payments that are permissible.

    Section 139 disaster relief payments

    Historically, disaster relief funds paid by governmental agencies were considered tax-free to the individuals who received such funds. In response to the terrorist attacks of September 11, 2001, Section 139 was added to the Internal Revenue Code to provide a mechanism for private entities to also provide disaster relief payments to individuals on a tax-free basis. If qualified, such payments are not included in the gross income of employee-recipients and are not subject to employment taxes. They are, nevertheless, deductible business expenses for employers.

    In order to qualify as a coronavirus-related disaster-relief payment subject to Section 139, the payment must be a “reasonable and necessary” payment or reimbursement for personal, family, living, or funeral expenses incurred as a result of a qualified disaster.The coronavirus pandemic became a “qualified disaster” [1] for purposes of Section 139 relief payments on March 13, 2020, and it will remain qualified until the president declares that the federally declared disaster condition has ended. While the designation is in effect, the only remaining question is what qualifies as “personal, family, living, or funeral expenses” related to coronavirus.

    “Personal, family, living, or funeral expense” payments eligible for tax relief

    IRS guidance confirms that medical, temporary housing, transportation expenses, in addition to “other” personal, family, living, or funeral expenses, can be provided on a tax-free basis. However, the IRS has made clear that payments in the nature of income replacement, such as payments to individuals for lost wages or unemployment compensation, are not eligible for tax relief.

    If payments are “reasonably commensurate” with the expenses incurred, employees are not required to account for actual expenses incurred. To-date, the IRS has issued guidance formally approving an employer-provided Section 139 payment, which provided a uniform payment that was available to all employees regardless of length or type of service with the employer.

    Potential expenses eligible for tax relief

    Employer-provided payments to pay or reimburse employees for the following expenses may fall within the scope of qualified Section 139 disaster relief payments:

    • Out-of-pocket medical costs [2]
    • Child care costs for employees who must report to a workplace
    • Mortgage, rental, or other temporary housing costs
    • Grocery/meal delivery expenses
    • Commuting costs via Uber/Lyft because public transportation is not available, reliable, or presents the risk of coronavirus exposure
    • Expenses for caregivers of family members who don’t live in the same home, such as food deliveries, postage, private duty nurses, or eldercare, etc.
    • Laptops, hot spots, internet access, or cellular devices for remote learning and employment needs of all family members
    • Rental cars and parking expenses

    In order to protect employees who are the recipients of these payments, we strongly recommend that employers adopt a disaster relief plan customized to the needs of their workforce and business, and document that the actual payments comply with their own plan. The plan benefits should be designed to be responsive to the “reasonable and necessary expenses” employees are likely to incur. The relief payment amounts should not be proportionate to salary levels, longevity of employment, or other factors that might indicate an intent to subsidize lost wages.

    Employers considering adopting a disaster relief plan should consult with counsel before implementing such arrangements in order to avoid adverse tax consequences for the employer and employees.


    1. “Letter from President Donald J. Trump on Emergency Determination Under the Stafford Act.” March 13, 2020. [Back to reference]
    2. Although disaster relief payments may subsidize the cost of medical expenses that would otherwise be deductible for employees who itemize their tax deductions, Section 139 prevents taking an itemized deduction for those amounts. This will not affect employees who claim the standard deduction. [Back to reference]

    Practices

    TaxLabor, Employment & BenefitsEmployee Benefits & ERISA

    Insights And Happenings

    • Press Release

      Experienced litigator joins Nixon Peabody Labor and Employment practice

      Sep 8, 2022
    • Alert

      IRS provides much needed coronavirus (COVID-19) related relief for cafeteria plans and flexible spending arrangements

      May 18, 2020
    • Alert

      Guide to access funding and other key considerations impacting the business of non-hospital health care providers/employers operating small businesses

      April 1, 2020
    The foregoing has been prepared for the general information of clients and friends of the firm. It is not meant to provide legal advice with respect to any specific matter and should not be acted upon without professional counsel. If you have any questions or require any further information regarding these or other related matters, please contact your regular Nixon Peabody LLP representative. This material may be considered advertising under certain rules of professional conduct.

    Subscribe to stay informed of the latest legal news, alerts, and business trends.Subscribe

    • People
    • Capabilities
    • Insights
    • About
    • Locations
    • Events
    • Careers
    • Alumni
    • Cookie Preferences
    • Privacy Policy
    • Terms of Use
    • Accessibility Statement
    • Statement of Client Rights
    • Purchase Order Terms & Conditions
    • Nixon Peabody International LLC
    • PAL
    © 2025 Nixon Peabody. All rights reserved