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A Tax Advantaged Way to Use Disaster Relief for Employees

March 27, 2020

In the wake of the coronavirus pandemic, some employers are considering additional ways to help their employees through this unprecedented time.  One way employers can accomplish this is by making  “qualified disaster relief payments” to employees to reimburse or pay for certain expenses incurred as a result of COVID-19.

What expenses qualify?

“Reasonable and necessary personal, family, living or funeral expenses” incurred as a result of COVID-19 are qualifying expenses.  Examples include:

  • Medical expenses not paid by insurance, such as the employee’s deductible and out-of-pocket expenses
  • Over-the-counter medications
  • The cost of an employee’s child care or tutoring for family members who are not permitted to attend school during the pandemic
  • Funeral expenses of an employee or a member of an employee’s family
  • Costs an employee incurs as a result of working from home, including the cost of cell phone usage, printer, supplies, etc.

What are the tax consequences to the employee and the employer?

  • The payments are not taxable to the employees
  • Employers may claim a deduction for the payments

What expenses do not qualify?

  • Amounts paid that are intended to replace lost income; therefore, sick pay and payments for family medical leave are NOT qualified disaster relief payments
  • Expenses otherwise paid or reimbursed by insurance

What records should the employer keep related to the payments?

  • Establish a written program detailing what expenses you, as an employer, will reimburse−a memo to your employees is sufficient. The program must be offered to employees equally.
    • The program should note if there is a maximum amount per employee or in the aggregate that will be paid under the program
    • The program should include the method by which the employee should request reimbursement from the employer
  • Maintain a listing of the amounts paid and to whom
  • Record the payments separately from payroll expenses in your general ledger in a new account for “Qualified Disaster Relief Payments”

 If you have further questions regarding qualified disaster relief payments or any of the recent legislation intended to provide relief for those affected by the coronavirus, please contact your MarksNelson advisor at (816) 743-7700.

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