Companies with employees in the Southern California area have several tax-advantageous alternatives when providing employees with disaster relief. This alert outlines the more common relief programs available under IRS guidance.
Section 139 Plan
This most direct arrangement is a program known as a “Section 139 Plan” in which the employer makes payments directly to the employee. Internal Revenue Code Section 139 allows employers to make payments for the benefit of an employee to reimburse or pay certain expenses not otherwise compensated for by insurance or otherwise.
These payments are not subject to federal employment tax (i.e., not taxable to the recipient) and are deductible to the employer under Section 162 if the following requirements are satisfied:
- There was a qualified disaster, as declared by the President under the Stafford Act or a disaster resulting from certain terrorist or military actions;
- The employer-provided assistance was to pay or reimburse out-of-pocket expenses attributable to the qualified disaster; and
- Payments or reimbursements from the employer were for reasonable and necessary personal, family, and living expenses including repair or rehabilitation of a personal residence or its contents.
The downside of a Section 139 Plan is that it does not allow company employees to make tax-deductible contributions.
Employee Relief Fund Provided Through a Third-Party Public Charity
This alternative utilizes a third-party public charity (often a community foundation) to administer an employee relief fund for the employees of a particular employer. One benefit of this alternative is that both the employer and other employees can make tax deductible donations to the fund. Another benefit is that the third party administers the fund, providing expertise and administrative help to the employer. This alternative may involve higher third-party service fees than merely offering a Section 139 Plan but is much quicker to establish than a company-sponsored public charity or private foundation.
Company-Sponsored Private Foundations or Public Charities
Another alternative is for the company to organize and operate a company-sponsored public charity or private foundation to provide disaster relief assistance to employees. Utilizing a company-sponsored public charity or private foundation also allows employees to make tax-deductible contributions. However, a public charity or private foundation is not easily set up, and the IRS places additional restrictions on company-sponsored public charities and private foundations. For example, the IRS requires that recipients of assistance be chosen based on an objective determination of need or distress by an independent selection committee or similar procedure to ensure that any benefit to the employer is incidental. Further, because this arrangement would involve a company-sponsored private foundation or public charity, the IRS may subject the organization and the company to punitive tax rules if all the applicable requirements are not met. We recommend a company work closely with counsel if utilizing a company-sponsored private foundation or public charity.
Additional Arrangements
Other potential alternatives available to employers to help affected employees include leave sharing arrangements and retirement and deferred compensation plan distributions.
For further information, please contact:
Anthony G. Provenzano, Partner, Crowell
aprovenzano@crowell.com
