Robin Ferriby, a CMF member and senior counsel at Clark Hill, PLC, explains the implications of payments made to individuals by employers and philanthropic organizations following the declaration of COVID-19 as a national emergency.
Robin Ferriby, a CMF member and senior counsel at Clark Hill, PLC, explains the implications of payments made to individuals by employers and philanthropic organizations following the declaration of COVID-19 as a national emergency. Plus: Additional considerations shared by Jennifer Oertel, a CMF member, shareholder with Bodman PLC and CMF’s Impact Investing Expert in Residence.
The U.S. has been under a state of emergency since March 13 due to the COVID-19 pandemic. The declaration enacted by the president unlocks federal resources to combat the virus under the Robert T. Stafford Disaster Relief and Emergency Assistance Act.
As an organization, what does this mean to you as an employer and to other employers in your community?
The declaration triggers the provisions of Internal Revenue Code (“IRC”) Section 139. This code section provides that the gross income of employees shall not include any amount received as a “qualified disaster relief payment.” Qualified disaster relief payments include “any amount paid to or for the benefit of an individual”:
To reimburse or pay reasonable and necessary personal, family, living or funeral expenses incurred as a result of a qualified disaster.
To reimburse or pay reasonable and necessary expenses incurred for the repair or rehabilitation of a personal residence or repair or replacement of its contents to the extent that the need for such repair, rehabilitation or replacement is attributable to a qualified disaster.
By a person engaged in the furnishing or sale of transportation as a common carrier by reason of the death or personal physical injuries incurred as a result of a qualified disaster, or
If such amount is paid by a federal, state, or local government, or agency or instrumentality thereof, in connection with a qualified disaster in order to promote the general welfare,
but only to the extent any expense compensated by such payment is not otherwise compensated for by insurance or otherwise.” IRC §139(b)
For example, during this type of extreme need if employers should provide additional medical assistance not already covered, or child care through direct employee payments, then those would not be taxable to either the employee or employer provided that it meets the eligibility qualifications as outlined.
It’s important to note that qualified disaster payments which are exempt from income tax do not include wage replacement payments. In addition, qualified disaster relief payments are exempt from employment taxes.
What does the emergency declaration mean for foundations and charities?
The last time an infectious disease resulted in a declaration of a national emergency was in 2014. Notice 2014-65 declared the Ebola outbreak as a national emergency. That 2014 notice references Publication 3833, Disaster Relief: Providing Assistance Through Charitable Organizations, for additional guidance on how charitable organizations, including employer related private foundations, public charities, private foundations and donor advised funds could make relief payments to individuals.
Publication 3833 provides explanations and examples relating to:
The definition of a “charitable class” and how to ensure that the class of potential recipients will be indefinite enough to be charitable.
How to determine when recipients are “needy or distressed.”
What short-term and long-term benefits can be provided.
How employer-related programs can qualify as charitable.
Record-keeping and reporting requirements.
While Publication 3833 provides a helpful initial reference, please contact your legal and tax counsel for additional guidance.
Continuing Considerations
Jennifer Oertel, a CMF member, shareholder with Bodman PLC and CMF’s Impact Investing Expert in Residence has drafted a memo for corporate clients on this issue. It is posted on CMF’s COVID-19 Resource Central page for informational purposes.
