There are numerous types of exceptions that companies are making in support of specific employee circumstances that tie to COVID-19.
As the coronavirus pandemic continues, global mobility programs have witnessed many employee situations that have been impacted by factors specifically related to the COVID-19 disaster. In a recent Plus survey, all global mobility programs we spoke with were open to receiving exception requests related to the pandemic, and approximately four out of five companies are managing the exceptions resulting from employees' personal concerns or government requirements/restrictions on a case-by-case basis. The remaining companies are in the process of setting budgets and defining which expense types will be pre-approved relating to COVID-19.
How does a relocation or assignment benefit become a disaster relief expense?
Once COVID-19 was declared a national emergency by President Trump on March 13, many, if not all, of these relocation or assignment "exception expenses" became eligible to qualify as "disaster payments" as outlined in IRC Section 139. According to Pete Scott of Worldwide ERC:
"By declaring a national emergency on 13 March, President Trump triggered provisions of the Internal Revenue code that permit employers to make disaster relief payments tax-free...Many planned relocations have been affected by the Covid-19 emergency, and payment or reimbursement of resulting costs should be covered by Section 139. The section says that 'qualified disaster relief payments' are not taxable income but may still be deducted by employers."
What types of global mobility expenses then can be considered non-taxable?
There have been a wide-range of expenses that have been approved as exceptions for employees working through a relocation or assignment. Below are a few examples of expenses that previously would have been taxable but are now possibly not taxable as they could be defined as "disaster relief."
- An extra two months of temporary accommodations and household goods storage that was approved because an employee was in temporary accommodations but is unable to complete their home purchase as the seller is no longer relocating due to COVID-19.
- Two extra days of destination services offered for virtual walk-throughs of apartments to support an extended rental housing search as a home-finding trip could not be taken due to travel restrictions.
- Three months rent in Dublin to cover costs no longer able to be paid by a roommate who was confirmed with COVID-19 so is now sick and cannot pay the down payment and first month's rent.
For a longer list of examples of payments that might reasonably be excludable, read Pete Scott's article and the BDO article linked to this post.
Other details to consider relating to relocation or assignment expenses that could qualify as disaster relief:
A few additional points from BDO to consider when taking advantage of the existing tax code:
- To be qualified, the payments should not include non-essential, luxury, or decorative items or services.
- There is no limit on the amount or frequency of qualified disaster payments.
- Generally, state treatment for income tax withholding purposes will mirror the federal treatment of qualified disaster relief payments. However, BDO does suggest that, "Employers should determine on a state-by-state basis whether certain income tax withholding and/or unemployment insurance tax contribution obligations may arise in connection with such payments."
- Employers are not required to have a written program for qualified disaster payments, but are encouraged to formalize their review and payment process.
- Employees are not required to provide receipts or other proof supporting their expenses.
BDO also points out that Section 139 covers a broad spectrum of benefits, but would not cover anything done as a substitute for compensation, and the employer would need to document why any payments made are the result of a virus-related circumstance. It is not necessary that the expense be incurred after the declaration of the national emergency to qualify as a disaster relief payment, so long as the facts and circumstances support the conclusion that the expense was incurred as a result of the coronavirus pandemic.
Multiple benefits for mobile employees and mobility programs
While the approved exceptions may impact a hiring manager's budget as an extra cost that was not originally considered, there are a few positives to being able to label these expenses as disaster relief payments as opposed to typical relocation or assignment expenses. The positives are that they:
- avoid the costs from being included as income to employees
- avoid the need to gross up the expenses to cover the taxability, as they are excludable as disaster relief payments
- are fully deductible by the company
In summary, the result of qualifying relocation exception expenses as disaster relief allows the avoidance of an increased income for employees who are not having these expenses show up on their W-2s and avoids the additional costs to mobility programs of gross-up expenses that would have been paid to cover a portion or all of the tax burden.
What is a “qualified disaster payment”? A1: Qualified disaster payments are payments that are not otherwise reimbursed by insurance made by an employer to an employee that are reasonably expected by the employer to: Reimburse or pay reasonable and necessary personal, family, living, or funeral expenses incurred as a result of a qualified disaster; and Reimburse or pay reasonable and necessary expenses incurred for the repair or rehabilitation of a personal residence or repair or replacement of its contents to the extent that the need for such repair, rehabilitation, or replacement is attributable to a qualified disaster. The payments should not include non-essential, luxury, or decorative items or services.