ML BeneBits


As the Code Section 139 relief period is scheduled to end soon along with the end of the COVID-19 national emergency, employers that assisted employees with personal expenses attributable to the COVID-19 pandemic should consider taking certain steps before the period ends.

Internal Revenue Code Section 139 provides a tax-free way for employers to assist employees with personal expenses attributable to a nationally declared emergency, when certain conditions are met. Under Code Section 139, “qualified disaster assistance payments,” which are not subject to federal employment tax, include amounts paid to “reimburse or pay reasonable and necessary personal, family, living, or funeral expenses incurred as a result of a qualified disaster [that are] not otherwise compensated for by insurance or otherwise.”

In order for a payment to qualify for exclusion under Code Section 139, the following requirements must be satisfied: (1) there has been a “qualified disaster,” (2) assistance is intended to cover unexpected, out-of-pocket expenses attributable to the qualified disaster, (3) assistance must be reasonably expected to cover reasonable and necessary (as opposed to lavish or extravagant) personal, family, and living expenses, and (4) assistance is not intended as a wage replacement or wage supplement.

Since President Joseph Biden declared a national emergency concerning the COVID-19 pandemic on March 13, 2020, the “qualified disaster” requirement has been met, thereby triggering potential application of Code Section 139 when the other requirements are also met. During the national emergency, employers have assisted employees with a variety of personal and living expenses related to the COVID-19 pandemic, including for example, increased utility costs associated with working from home, increased childcare costs associated with school closures and summer camp cancellations, and pandemic-related health safety costs such as out-of-pocket COVID testing, disposable masks, and cleaning products.

On February 10, 2023, President Biden declared his intent to terminate the COVID-19 national emergency, effective May 11, 2023. Upon termination, employers will no longer be able provide non-taxable assistance to employees for personal expenses attributable to the pandemic on the basis of Code Section 139. With just over two months before the conclusion of the national emergency, employers that continue to provide assistance on the basis of Code Section 139 should consider taking the following steps in the interim:

  • Coordinate with tax, human resources, and third-party fringe benefits service providers to determine how to adapt personal and living expense-related benefits offerings to a post-national emergency setting. Efforts should be made to determine whether alternative employment tax exclusions apply, as well as the taxable “fair market value” to be used in valuing otherwise taxable benefits provided after the end of the national emergency.
  • Coordinate with payroll to determine whether to begin charging employees or imputing into income the value of any non-excludable fringe benefits.
  • Communicate forthcoming changes to affected employees before the end of the national emergency so that employees have sufficient time to adapt to the changes in fringe benefits offerings, out-of-pocket cost, or net tax impact.
  • From a tax compliance perspective, employers that have relied on Code Section 139 should be prepared to substantiate any COVID assistance payments in the event of an IRS audit. This includes preserving employee communications describing eligibility, scope, available assistance, and expense documentation.

If you have any questions on the issues discussed in this blog post, please reach out to any of the authors for assistance.