What Is Section 139 Disaster Relief?

Section 139 of the Internal Revenue Code allows employers to offer financial assistance to employees impacted by major disasters. These tax-advantaged payments are made directly from an employer to an employee to help with necessary expenses from a catastrophic event. This financial support aids recovery without creating an additional tax burden for the recipient.

Defining a Qualified Disaster

For a payment to be considered under Section 139, it must be linked to a “qualified disaster.” This term does not apply to any disruptive event but is specifically defined by federal law. An event achieves this status only when the President makes a formal declaration under the Robert T. Stafford Disaster Relief and Emergency Assistance Act.

The declaration signifies the disaster’s severity is beyond the capabilities of state and local governments. Events that may receive this designation include hurricanes, floods, wildfires, and earthquakes. To confirm an event’s status, employers can consult the Federal Emergency Management Agency (FEMA) website, which maintains a database of all official declarations.

This official designation is the trigger for Section 139 provisions. Without a presidential declaration, any financial assistance from an employer would be treated as taxable compensation. Verifying the disaster’s official status is the foundational step before making any payments.

Qualified Disaster Relief Payments

Section 139 outlines specific categories of expenses that employer payments can cover. These “qualified disaster relief payments” are intended to reimburse reasonable and necessary costs from the disaster. The payments address immediate needs and are not a substitute for salary.

One primary category is for personal, family, living, or funeral expenses. This can include the cost of temporary shelter if a home is uninhabitable, medical expenses not covered by insurance, or costs associated with a funeral. It could also cover replacing everyday necessities like clothing or food that were destroyed.

Another category of permissible payments is for the repair or rehabilitation of a personal residence. This applies to expenses needed to restore the employee’s home to its pre-disaster condition. This could involve payments for structural repairs, such as fixing a damaged roof, or for interior work like replacing drywall and flooring.

Similarly, payments can be made for repairing or replacing the contents of a personal residence. This covers the loss of furniture, appliances, electronics, and other personal belongings inside the home. For instance, it could cover the cost of a new refrigerator, beds, or a computer if they were destroyed.

Section 139 explicitly excludes payments that replace lost wages, income, or other forms of compensation. Additionally, the payments cannot be used for expenses that are already compensated for by insurance or other means, as this would constitute a “double benefit.”

Tax Treatment for Payers and Recipients

Qualified disaster relief payments are favorable for both the employee and employer. For the recipient, these payments are excluded from gross income for federal tax purposes. This means the employee owes no federal income tax on the amount, and the funds are also exempt from Social Security and Medicare (FICA) taxes.

Because these payments are not considered wages, they should not be reported as taxable income on the employee’s Form W-2. The tax-free nature of the aid ensures that the full value of the payment is available to the employee for their recovery needs.

For the employer, the payments made under a Section 139 plan are generally tax-deductible as an ordinary and necessary business expense under Section 162. This allows the business to reduce its own taxable income by the amount of disaster relief it provides to its workforce.

Substantiation and Recordkeeping

While the rules under Section 139 are flexible to facilitate rapid assistance, certain recordkeeping practices are necessary. Employees are generally not required to provide their employer with detailed receipts or an accounting of how they spent the relief funds, which reduces the administrative burden on them.

Payments must be reasonable and commensurate with the expenses an employee would be expected to incur. An employer cannot provide an arbitrary amount and should base the payment on a reasonable assessment of needs, perhaps using a tiered system based on the severity of impact.

Employers must keep internal records of their disaster relief program. These records should document the plan itself, showing it was established to provide qualified disaster relief. The documentation should also include who received payments, the date of the payments, and the amounts paid to substantiate the employer’s tax deduction.