Section 139 Plans - Relief in the Midst of Disaster - An Avenue for Employers to Help Employees

As Hurricane Harvey has devastated our Texas coast, we at Sommerville & Associates, P.C. are praying for all of those affected.  As is evidenced across the country, everyone is looking for ways to reach out and alleviate any part of the pain and suffering of those affected by the hurricane and the corresponding floods.  As the rains continued to fall and the waters rose last week, the estimated recovery costs continued to climb.  No one knows what the cost will be, but it is now anticipated the cost will surpass the recovery costs of Hurricane Katrina.  

Many of our churches and nonprofit clients have been directly affected by Harvey, as have many of their employees.   With less than 15% of the affected residences insured for floods, much of the costs of rebuilding will come from personal resources supplemented by federal resources.  The nonprofit community has a deep desire to assist those in need, both employees and others, and many resources are already flowing into the nonprofit community.  

Nonprofit organizations, especially churches, may operate benevolence programs to assist the community with special needs.  Many programs are already established and provide a structure available to assist with needs arising from Harvey.  Generally recipients are not taxed on payments from a regular benevolence program, but an organization's employees may not receive tax free payments from a benevolence program due to limitations placed on such programs through IRC Section 102.

With limitations on assistance from benevolence plans for employees, there aren't many avenues available for employers to offer tax free assistance to employees.   After the 9/11 terror attacks, Congress decided to provide an avenue for employer to employee assistance in the case of certain disasters.  

Qualifying Disaster Relief – IRC Section 139

Congress enacted IRC Section 139 in 2002 as a means of clarifying the taxable nature of assistance payments received to victims of a qualifying disaster.  

Qualifying Disaster

A qualifying disaster is one that is the result of or related to: 

• a terrorist action;
• a Presidential declared disaster area; 
• accident involving a common carrier; or
• any other IRS declared qualifying disaster. 

Victims of one of these disasters create a qualifying charitable class allowing assistance to be provided to the victims.  This charitable class may include employees, their family members and major donors.  While any employer is allowed to set up, these plan are especially advantageous for nonprofit employers who have the ability to raise funds for the plans from donors. 

On August 26, 2017, President Trump signed a major disaster declaration for those portions of Texas that Hurricane Harvey severely affected. The designated counties include: Aransas, Bee, Brazoria, Calhoun, Chambers, Colorado, Fayette, Fort Bend, Galveston, Goliad, Hardin, Harris, Jackson, Jasper, Jefferson, Kleberg, Liberty, Matagorda, Montgomery, Newton, Nueces, Orange, Refugio, Sabine, San Jacinto, San Patricio, Victoria, Waller, and Wharton. This list can continue to grow, and we recommend that employers view the most accurate list at this FEMA website: https://www.fema.gov/disaster/4332#.

Qualifying Payments

Payments for these expenses are qualified disaster relief payments:

• reasonable and necessary personal, family, living, or funeral expenses incurred because of a qualified disaster;
• reasonable and necessary expenses for the repair or rehabilitation of a personal residence due to a qualified disaster (a personal residence can be a rented residence or one you own); and
• reasonable and necessary expenses for the repair or replacement of the contents of a personal residence due to a qualified declared disaster.

Further, recipients of  qualified disaster relief payments do not have to account for all of their expenses, as long as the payments received are reasonably expected to be equal to the expenses the recipients incurred.

There are two key limitations to Section 139. Qualified disaster relief payments do not include:

• payments for expenses otherwise paid for by insurance or other reimbursements; or
• income replacement payments (i.e., payments of lost wages, lost business income, or unemployment compensation).

Setting Up the Plan

Organizations desiring to set up a Section 139 plan should determine: 

• who will qualify for the assistance; 
• how assistance can be requested (an application is recommended);
• what type of assistance will be granted; and 
• how the assistance will be paid or provided.

Summary

While a Section 139 plan doesn't provide for all instances where an employer may desire to assist an employee, it is certainly an avenue available to providing assistance during some of the most trying times a community may face.  For more information regarding these plan or a sample application, please feel free to contact me at elaine@nonprofit-tax.com or find more information and a sample plan at http://www.wkpz.com/help_for_employers_addressing_disaster.php.