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Employers can provide benefits, tax-free, to employees who are victims of Superstorm Sandy under tax code Section 139 and Internal Revenue Service guidance, a practitioner said Oct. 30.
Section 139 provides that, in the case of a presidentially declared disaster, an employer can give cash or benefits to assist employees. The payments are exempt from federal income tax and employment taxes, no substantiation is required from the employees, and the employer is able to deduct the payments, Ruth Wimer, a partner at McDermott Will & Emery in Washington, D.C., told BNA.
“There is essentially no administration involved for the employer to be able to take advantage of this type of plan,” she said.
Wimer said the ease in providing relief to employees makes it very attractive to employers and “thus fulfills the role of Congress in enacting this relief.” In considering whether to provide disaster relief for employees in a designated area, employers should consider who will be covered under the program and the period of coverage, Wimer said.
The Victims of Terrorism Tax Relief Act added Section 139 to the tax code in 2001. Section 139(a) provides that gross income does not include any amount received by an individual as a qualified disaster relief payment.
Section 139(b) defines, in part, “qualified disaster relief payment” to mean 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
• to reimburse or pay reasonable and necessary expenses incurred for repair or replacement of the contents of a personal residence, to the extent that the need for such repair, rehabilitation, or replacement is attributable to a qualified disaster.
A personal residence can be one that is rented or owned, according to IRS Publication 3833.
In addition, Section 139(b)(4) provides that a qualified disaster relief payment also can be an amount 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.
In Revenue Ruling 2003-12, IRS said the exclusion for payments made under Section 139(b)(4) is in addition to the administrative general welfare exclusion for certain disaster relief payments to individuals, citing earlier revenue rulings relating to payments from social benefit programs.
Under Section 139(b), the amounts will be excluded from income only to the extent that any expense compensated by the disaster relief payment is not compensated for by insurance or otherwise.
Income replacement payments, such as payments of lost wages, lost business income, or unemployment compensation are not qualified disaster relief payments.
In general, Section 139(c) provides that the term “qualified disaster” means:
• a presidentially declared disaster (defined generally, as a disaster in an area that has been subsequently determined by the president to warrant federal assistance under the Disaster Relief and Emergency Assistance Act),
• a disaster resulting from any event that is determined by the secretary of the treasury to be of a catastrophic nature,
• a disaster resulting from terrorist or military actions, or
• a disaster resulting from an accident involving a common carrier.
Rev. Rul. 2003-12 quotes the Joint Committee on Taxation's Technical Explanation of the Victims of Terrorism Tax Relief Act of 2001 to explain why there is no substantiation requirement connected to receipt of the relief.
According to the technical explanation, because “of the extraordinary circumstances surrounding a qualified disaster, it is anticipated that individuals will not be required to account for actual expenses in order to qualify for the [§ 139] exclusion, provided that the amount of the payments can be reasonably expected to be commensurate with the expenses incurred.”
In the revenue ruling, IRS builds on this explanation by providing three situations in which payments to disaster victims are analyzed for their exclusion under Section 139.
For employers, the pertinent example is Situation 3. In Situation 3, IRS said, “Payments that employees receive under an employer's program to pay or reimburse unreimbursed reasonable and necessary medical, temporary housing, or transportation expenses they incur as a result of a flood are excluded from gross income under section 139.”
In addition, the revenue ruling held that amounts that are excluded from gross income under Section 139 are not subject to information reporting under Section 6041.
By Mary Hughes
Text of a list of disaster declarations by state is available at http://www.fema.gov/disasters.
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