How Employers and Employees Can Give Disaster Assistance – and the Tax Breaks that Go with It
After any major disaster, either natural or man-made, it’s hard to stand by and watch. When you see people whose homes have been destroyed and whose lives have been uprooted, it’s a natural response to want to help.
As an employer, you may feel an urge to help your employees get back on their feet faster. Not only is it a nice thing to do – the sooner your employees get resettled after a disaster, the sooner they can shift their attention back to work.
Whatever your motivation, when you give assistance to your employees, there can be tax benefits to you and your employees, if you do it right.
Leave Sharing Programs
If you give paid leave to an employee so they can help with recovery efforts after a disaster, you can deduct that amount from your taxes as long as it is an ordinary, necessary and reasonable business expense. It is treated no differently from other compensation.
Some places set up programs where employees can donate some of their own paid leave to fellow coworkers who were affected by a disaster and could use the extra paid time off. The amount of that leave is taxable for the coworker receiving the paid leave. .
You can also allow employees to forego vacation, sick and personal leave in return for a contribution to a qualified charity. To qualify, the payments to the charity must be made by December 31, 2018, for the purpose of providing relief to the victims of Hurricanes Harvey or Irma. While it hasn’t been announced yet, we expect that contributions for the victims of Hurricane Maria will also become eligible for this treatment.
Employees who give up their paid time off do not pay income or payroll tax on the value they contribute. If the leave is given to an employee, the amount received is treated as compensation to the other employee and is subject to income and payroll taxes.
Employees who give up leave pursuant to a leave sharing plan cannot claim a deduction for the amount they donate, since it is not included in their income. However, employers are allowed to deduct contributions made to a charity under such a plan, regardless of any limit on deducting charitable contributions that would otherwise apply.
Employee Assistance and Qualified Disaster Relief Payments
If you give assistance to your employees affected by the recent hurricanes, the payments you make may be tax deductible for you and not subject to tax for the employee. Qualified disaster relief payments don’t count as gross income for individuals who receive these payments.
Qualified disaster relief payments are meant to pay for “reasonable and necessary” expenses directly incurred as a result of a disaster, as long as the expense isn’t expected to be compensated from another additional source. To qualify for this treatment, payments must be:
- Personal, family, living and funeral expenses incurred as a result of the qualified disaster
- Payments to repair or rehabilitate a personal residence, as well as its contents, needed as a result of the qualified disaster
As long as the payments that an individual taxpayer receives are expected to be commensurate with the expenses that have been incurred as a result of the qualified disaster, the taxpayer generally isn’t required to account for actual expenses.
On the other hand, any payments that can be characterized as income replacement, such as unemployment compensation and payments for lost wages, are taxable and should be included in employees’ gross income.
What Qualifies as a Disaster?
Hurricanes aren’t the only disasters that qualify for tax-exempt relief payments. The Code outlines the following types of qualifying disasters:
- Terrorism or military action
- Presidentially declared disasters
- Accidents that involve a common carrier or any other event the IRS determines to be catastrophic
In addition, if a federal, state or local authority has deemed a disaster to warrant assistance from government agencies, amounts paid by those agencies for general welfare are generally exempt. Other payments for a disaster that isn’t a presidentially declared disaster are taxable. For example, say a high-rise apartment building burns down, and the city gives everyone stipends for clothes and shelter in the aftermath of such a disaster. Because the disaster wasn’t presidentially declared, those stipend amounts count as taxable income.
Loans and Hardship Distributions from Retirement Plans
The IRS has provided special rules that make it easier for certain retirement plans to make loans and hardship distributions to employees and former employees who need money as a result of the recent storms. To qualify for these relaxed rules, distributions and loans must be made by January 31, 2018. They also must be made pursuant to a qualified plan that specifically allows them or is amended to allow them.
While a plan normally has to include enabling language before it makes loans or hardship distributions, that rule is suspended for distributions and loans related to Hurricanes Harvey, Irma and Maria. Instead, the plan can make the funds available without jeopardizing its status, as long as the document is amended to provide for these loans and hardship distributions by the end of the first plan year that begins after December 31, 2017.
Under the disaster relief provisions, a plan can make loans or hardship distributions based on any hardship of the participant or his or her parents, grandparents, descendants, dependents or spouses who had a principal residence or worked in Florida, Georgia, Puerto Rico, the Virgin Islands or parts of Texas and who experienced hardship as a result of named storms Harvey, Irma and Maria. The funds can even be tapped to help with expenses that would not normally qualify as hardships, such as food and shelter.
Plan administrators are allowed to rely on representations by the plan participants with respect to the need and amount of hardship distribution. They are also allowed to disregard certain procedural rules during the period ending January 31, 2018, provided they make a good faith effort to comply and to obtain any missing documentation as soon as possible.
Get the Most Good from Disaster Relief Payments
If you and your employees are participating in any of the relief activities outlined in this alert, you want to make sure that all of you are getting the most good from your efforts.
If you have questions about adopting a leave sharing plan so employees can provide relief to each other, or if you want to make tax free payments to employees affected by the recent hurricanes, reach out to Deb Walker, CPA, National Director of Compensation and Benefits for Cherry Bekaert. Whether you’re in the middle of disaster recovery or trying to prepare ahead of time for one, it’s never too late (or too early) to get compensation and benefits advice, so you can set everything up in the most advantageous way possible.
Additional Reading and Source Material
From the IRS:
- Notice 2017-48: Tax Treatment of Employer Leave-Based Donation Programs to Aid Victims of Hurricane Harvey
- Notice 2017-52: Tax Treatment of Employer Leave-Based Donation Programs to Aid Victims of Hurricane Irma
- Notice 2006-59: Amounts Paid Pursuant to a Leave-Sharing Plan to Assist Employees Affected by a Major Disaster
- IRS Press Release 2017-151: Like Harvey, Retirement Plans Can Make Loans, Hardship Distributions to Victims of Hurricane Irma
- Revenue Ruling 2003-12: IRS ruling regarding tax-free disaster relief payments
- Announcement 2017-11:Relief for Victims of Hurricane Harvey (where the IRS allows loans and hardship distributions from retirement plans to victims)
- Announcement 2017-13: Relief for Victims of Hurricane Irma (where the IRS allows loans and hardship distributions from retirement plans to victims)
From Cherry Bekaert:
Recovery Resources for 2017 Hurricane Season: Harvey and Irma
Florida and Georgia Eligible for Disaster Tax Relief