As a result of the March 13, 2020 declaration of a national emergency caused by COVID-19, certain less-often used provisions of the Internal Revenue have been modified and or activated that allow an employer to make certain benefits payments that result in a fully deductible payment by the employer and a tax-free benefit to the recipient employee.
The purpose of this memo is to summarize the tax treatment of disaster relief payments under IRC Section 139 and the treatment of payments to employees that are earmarked for payment of principal or interest on qualified education loans.
Qualified Disaster Relief Payments
Interpreting the provisions of this section of the law (Code Section 139) would suggest the following regarding current application in light of the national crisis that have favorable tax consequences. Key takeaways are as follows:
- Payments (within reason) are fully deductible by the employer
- Employees are not subject to tax on benefits received (certain exceptions)
- Qualified disaster relief payments are exempt from payroll taxes
- Reimbursable expenses include the following (Sampling only):
- Unreimbursed medical expenses including co-pays, deductibles, vitamins, and supplements
- Increased expenses associated with being quarantined at home (increased utilities)
- Expenses associated with setting up or maintaining a home office such as internet connections, computer equipment, office supplies, etc.
- Out of pocket expenses for transportation and lodging of family members including increased meal expense
- Increased childcare expenses
- Unlike other provisions in the law there is:
- No written plan requirement
- No burdensome record keeping requirement (provided the employer feels the reimbursements is appropriate)
- No dollar limit
- No discrimination testing
Exclusion for Certain Employer Payments of Student Loans
Section 2206 of the CARES Act added the following provision to an existing section of the tax code (Code Section 127).
“in the case of payments made before January 1, 2021, the payment by an employer, whether paid to the employee or to a lender, of principal or interest on any qualified education loan (as defined in section 221(d)(1)) incurred by the employee for education of the employee”
When read in conjunction with the balance of the applicable law we can conclude as follows:
- Employer payments of up to $5,250 can be deducted in full
- Employees will not be taxed on the benefit received
Note: Unlike the qualified disaster relief payments there are rules that require a written plan document and these payments are subject to anti-discrimination rules.
Employers have an opportunity to provide fully deductible tax-free benefits to employees enhancing the employer / employee relationship and recognizing the difficult environment that we are all faced to endure.
Note: The above information is provided as a service to clients of EFPR Group, LLP. It is intended for general information purposes only and should not be considered as comprehensive tax or legal advice. The contents are neither an exhaustive discussion, nor do they purport to cover all developments in the area. They can be used as a potential option when discussing your unique tax circumstances with your accountant. To talk to one of our EFPR Group accountants and create a plan for your business during this pandemic please contact us by completing the below form.
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