Employer-Provided Tax-Free Disaster Relief Payments

Last updated April 1, 2020

The COVID-19 pandemic, recently declared a national emergency, continues to substantially affect both employers and the national workforce. In light of the situation, employers may wish to consider the little-known existing provision of the Internal Revenue Code (the “Code”) — Section 139, Disaster Relief Payments (“Section 139”).

Added to the Code after the attacks of September 11, 2001, Section 139 offers employers a flexible and potentially tax-free method of reimbursing employees for certain qualifying expenses incurred by the employees as a result of COVID-19. Specifically, if an employer makes a payment to an employee, and the payment is a “qualified disaster relief payment” under Section 139, such payment will be generally tax-free to the employee (including, in most cases, for state income tax purposes) and will be deductible to the employer.

Qualified Disaster Relief Payments Under Section 139

Section 139 provides that “qualified disaster relief payments” made by an employer to an employee are excluded from the employee’s gross income and are not subject to any federal payroll taxes.

“Qualified disaster relief payments” are payments made to an employee for “reasonable and necessary” personal, family, living, or funeral expenses incurred as a result of a “qualified disaster”, provided that the expenses with respect to which the payments are made are not covered by insurance or otherwise paid for or reimbursed. Based on the President’s declaration of the COVID-19 pandemic as a national emergency, the COVID-19 pandemic should constitute a “qualified disaster” for purposes of Section 139, thus effectively excluding qualified COVID-19-related payments by an employer to an employee from the employee’s income (while, at the same time, resulting in a deduction for the employer).

Reasonable and Necessary Expenses

Although Section 139 has been utilized in the past for other nationally declared disasters, it has never been invoked in the context of a disease pandemic like the COVID-19 pandemic we are facing today, and the IRS has not issued any guidance regarding what types of expenses related to COVID-19 would be considered “qualified disaster relief payments” under Section 139.

Nevertheless, based on the legislative history and a reasonable interpretation of the statutory text of Section 139, payments from an employer to an employee that should qualify under Section 139 include, but are not limited to, the following, as long as the expenses with respect to which the payments are made are reasonable and necessary and not otherwise compensable or reimbursable (such as, by insurance):

  • Payments for medical expenses of the employee related to the employee’s COVID-19 treatment, such as co-pays, deductibles or vitamins;
  • Payments for other health-related expenses related to COVID-19, such as over-the-counter medications;
  • Payments for increased costs of child care or tutoring for the employee’s dependents resulting from school closures due to COVID-19;
  • Payments for other expenses related to remote learning or home schooling due to COVID-19, such as costs of additional computers;
  • Payments for increased expenses associated with working from home, such as additional costs of the internet, utilities, home office expenses etc.;
  • Payments for housing, critical care and funeral expenses for an employee or a member of the employee’s family who dies from COVID-19;
  • Payments for transportation and living expenses for college students returning home due to COVID-19;
  • Payments for increased employee transportation expenses due to decreased public transportation; and
  • Payments for other COVID-19-related expenses (such as nonperishable food items and cleaning products).

As stated above, only reasonable and necessary expenses related to COVID-19 qualify for reimbursement under Section 139. Therefore, expenses for items that are nonessential or luxury are not reimbursable. Additionally, the term “qualified disaster relief payments” does not include income replacement payments, such as payments of lost wages, lost business income, sick pay, family medical leave pay, or unemployment compensation.

According to the Joint Committee on Taxation’s Technical Explanation of the “Victims of Terrorism Tax Relief Act of 2001, employees are not required to account for actual expenses in order to qualify for the Section 139 exclusion, provided that the amount of the payments can be reasonably expected to be commensurate with the expenses incurred.

No Dollar Limit on the Amount of Section 139 Payments

Section 139 does not impose a dollar limit on the amount of “qualified disaster relief payments” that employers can make to employees (whether individually or in the aggregate), as long as the expense to which the payment relates was reasonable and necessary with respect to COVID-19. In addition, Section 139 does not require that employees work for the employer for a certain specific amount of time prior to receiving Section 139 payments.

No Deduction Limitation for Employers

As long as the payments made to the employee satisfy the requirements of Section 139, the payments should be fully deductible to the employer. Notably, however, if a self-employed individual or other owner-employee attempts to make Section 139 payments to himself, such person’s deduction of the payment is likely to be limited by Section 139(h), which denies the double benefits of such payments.

No IRS Reporting

Section 139 payments are not required to be reported on an IRS Form W-2 or Form 1099, and because they are not included in income, they are not subject to employment taxes or withholding obligations.

Plan Documentation

Section 139 does not require an employer to have a written plan for “qualified disaster relief payments.” Nevertheless, employers desiring to make “qualified disaster relief payments” related to COVID-19 should consider establishing a written plan setting forth the parameters of the program, such as the class of eligible employees, the start and end date of the program, the types of payments that meet the Section 139 requirements, and the procedure for requesting reimbursement. Employers should also ensure they have a procedure in place for requesting that the employees certify that the requested funds are reasonable and necessary for expenses associated with COVID-19, and are not otherwise reimbursable by insurance or otherwise. In addition to setting forth clear guidelines with respect to employer payments related to COVID-19, such a written plan also decreases the risk of an IRS audit.


Section 139 may be one of the most generous employee benefit provisions in the Code, providing for a variety of relief to employees in times of a national emergency such as the COVID-19 pandemic. Employers should consider taking advantage of the disaster relief provision to aid their employees in coping with the financial and other family hardships resulting from COVID-19.

Chiesa Shahinian & Giantomasi’s Tax Group and the entire firm are committed to assisting our clients through this difficult time. Please let us know how if you have any questions or concerns for which we may provide assistance.

For additional information pertaining to the coronavirus outbreak, please visit CSG’s COVID-19 Resource Center.

This publication contains general information on recent legal developments and is not intended to provide legal advice for a specific situation or to create an attorney-client relationship. Attorney Advertising. Prior results do not guarantee a similar outcome.

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