Natural forces wreaked havoc on a number of states and territories this fall when Hurricanes Harvey, Irma and Maria made landfall. The federal government sprang into action by making disaster declarations for affected areas to provide aid in the aftermath of these tragic events. More recently, the Federal Emergency Management Agency (FEMA) declared parts of northern California to be major disaster areas, due to highly destructive wildfires that ravaged parts of the state. In the wake of these disasters, employers are asking how they can help their employees and their communities.
Fortunately, there are options available to companies making an effort to provide assistance to their employees. First, companies may provide direct payments to employees and others affected by federally declared disaster areas on a tax-free basis. Amounts employers give to cover reasonable and necessary personal or living expenses of individuals impacted by one of the federally declared disasters are considered “qualified disaster relief payments.” The qualified disaster relief payments are excludable from the employee’s gross income. The tax-free treatment applies whether an employer pays for expenses directly or reimburses the individual.
Additionally, the Internal Revenue Service (IRS) announced several methods of relief available to employers seeking to provide aid to employees and others affected by Hurricanes Harvey, Irma or Maria. Specifically, the IRS has indicated the following options are available:
- Leave-based donation programs. Prior to Jan. 1, 2019, employees working for employers maintaining or adopting leave-based donation programs may elect to give up their vacation, sick or personal leave in exchange for their employer making a cash contribution to a charity assisting those impacted by Hurricanes Harvey, Irma or Maria. IRS guidance provides that donated leave will not be considered taxable income for employees making the donation, and employers can deduct the payments as business expenses.
- Hardship distributions and plan loans. Through Jan. 31, 2018, employers who sponsor qualified plans may expand hardship distribution and/or plan loan availability to participants affected by Hurricanes Harvey, Irma or Maria. The IRS has indicated that hardship distributions and plan loans may be offered to participants seeking to address needs of the participant or family members in the aftermath of the storms. In addition to this expansion, other restrictions which would generally apply, such as the automatic six-month suspension of elective deferrals following a hardship distribution, are suspended during this period.
A bill signed into law on Sept. 29, 2017, further expands plan distribution and loan availability in this context. The new law allows for plan loans and distributions up to $100,000 free of early withdrawal penalties. The law also provides relief from other plan loan restrictions such as repayment timing limitations.
Other programs may be available to assist individuals and businesses affected by the recent natural disasters, some of which we have discussed previously. If you would like to learn more about how you can take advantage of tax incentives to provide assistance to your employees or others impacted by the recent disasters, please contact us.