On March 13, 2020, the president declared the COVID-19 pandemic of sufficient severity and magnitude to warrant an emergency declaration for all states, tribes, territories and the District of Columbia pursuant to section 501(b) of the Robert T. Stafford Disaster Relief and Emergency Assistance Act, 42 U.S.C. 5121-5207 (the Stafford Act). Among other things, this enables employers nationwide to provide tax-favored financial assistance, called “qualified disaster relief payments,” to employees who are affected, directly or indirectly, by the virus.
Under our current emergency situation, a qualified disaster relief payment from an employer to an employee might include any amount paid to reimburse or pay reasonable and necessary personal, family, living or funeral expenses, where such expenses are incurred because of a qualified disaster, i.e., COVID-19. The payments cannot be for expenses that are paid for by insurance or otherwise. A qualified disaster relief payment paid by an employer to an employee is:
- Fully deductible by the employer as a salary expense, and;
- Not treated as taxable wages/income to employees.
There is no specific cap on the amount of qualified disaster relief payments other than the amount of the assistance must be “reasonable and necessary” and must not be for expenses reimbursable by insurance.
Because the payments are not taxable wages and therefore not reported on a Form W-2, they are likely to fall outside the definition of “compensation” under the employer’s qualified retirement plan and thus may not require additional employer retirement plan contributions or benefits. To ensure this is the case, the definitions in the employer’s retirement plans should be reviewed.
Employer-Sponsored Private Foundations
An employer-sponsored private foundation generally may not make payments directly to employees for personal or emergency hardships under the private foundation tax rules, however, an exception to this rule applies to payments made in connection with a qualified disaster. An employer-sponsored private foundation may make qualified disaster relief payments, however, it cannot simply provide wage replacement across the board to all affected employees. Instead, individual determinations of financial need for each affected employee must be made and the assistance provided must be tailored to the need. Even for payments made in response to a qualified disaster by a private foundation, the selection process must be made using either an independent selection committee or a similar procedure to ensure any benefit to the employer is incidental and tenuous. Generally, a foundation’s selection committee is independent if a majority of the members of the committee consists of persons who are not in a position to exercise substantial influence over the affairs of the employer.