Opportunities to Provide
Tax-Free Financial Assistance to Employees
As the COVID-19 pandemic continues and unemployment increases at an unprecedented rate, employers throughout the US are looking for different ways to assist their employees. Many employees even if they remain employed are in dire need of immediate financial assistance. The glimmer of good news in this grim situation is that there are several ways in which employers can provide tax-free payments to their employees while generating a tax deduction.
Direct Assistance – Code Section 139
On March 13, 2020 the president declared the ongoing COVID-19 pandemic to be a national disaster under the Safford Act. This declaration not only increased federal support provided in response to COVID-19, but also made available to employers Section 139 of the Internal Revenue Code. Under Section 139, qualified disaster relief payments made by an employer directly to an employee are not taxable to the employee and are not subject to employment taxes or withholding. In addition, employers may reasonably take the position that qualified disaster payments are tax deductible.
Qualified relief payments may include payments made by an employer to an employee for medical and health-related expenses due to COVID-19, additional expenses relating to childcare and home schooling as a result of school closures, expenses incurred due to quarantine enforcement, and funeral expenses for an employee or family member who dies from COVID-19.
Indirect Assistance – Employee Assistance Funds (EAFs)
Another way for an employer to provide its employees with tax-free financial assistance is to establish an employee assistance fund. An EAF is generally an employer-sponsored tax-exempt charitable organization established to provide emergency, need-based financial assistance to the employer’s work force. Benefits provided by an EAF may be restricted to the employees of a specific employer so long as the EAF also benefits employees affected by future disasters or emergencies. Employer contributions to an EAF may be deductible as a charitable contribution under Section 170 of the Code. Helpfully, the charitable deduction amount under Section 170 was increased under the CARES Act.
The EAF may be set up as a public charity, a donor advised fund, or even a private foundation. An EAF that is set up as a donor advised fund or a private foundation is generally subject to more stringent rules, because these two structures are disfavored by the IRS. A public charity is subject to fewer rules. But a public charity must receive a substantial portion of its contributions from the general public which subjects it to greater public scrutiny.
Employers looking to help their employees through these difficult times are actively exploring EAFs because of the tax advantages they provide. EAFs are complicated. But if structured properly they can provide a win-win to both the employer and employee and help stretch the financial assistance just a little further.