Tax-free disaster relief payments still in effect

The U.S. extends the national emergency related to COVID-19

According to The White House, the national emergency declared on March 13, 2020, and beginning March 1, 2020, will continue in effect beyond March 1, 2022. The notice of this extension was dated on Feb. 18, 2022, and no end has been indicated.

What does this mean for global mobility programs?

According to David Oltman, CCO of INEO, it is good news that IRC Section 139 is still in effect for mobility-related expenses – and still offers a favorable “non-taxability” code. There are still a wide-range of expenses that can be and have been approved as exceptions due to COVID-19 for employees working through a relocation or assignment. Below are a few examples of expenses that Mr. Oltman cites:

1. Extra time in temporary accommodations is the most common expense.
2. Work-from-home type of expenses, such as setting up an office and the increased utility expenses as people have relocated but the office has not yet opened.
3. Extra commuting costs, such as taxis and Ubers instead of utilizing mass transit.

Our previous post on the topic (see below) provided other possible examples, too. We also noted these key points in that post: 

Other details to consider relating to relocation or assignment expenses that could qualify as disaster relief:

As a reminder, there are 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.