In coping with the aftermath of Hurricane Sandy, which affected millions of individuals across the eastern United States, there are a number of potential programs that employers can implement in order to assist employees. Two such programs will be examined in this Alert: (1) the establishment of a major disaster leave sharing plan and (2) tax-free qualified disaster relief payments.
Major Disaster Leave Sharing Plan
Leave sharing plans typically exist so that employees who suffer medical emergencies qualify as recipients of leave surrendered to the employer by other employees. The amounts the employer pays to a leave recipient to such a plan are includible in the gross income of the recipient. However, the employee who surrenders leave to the employer does not realize any income or incur any deductible expense or loss upon the surrender of the leave or its use by the recipient.
Due to the fact that Hurricane Sandy has been declared a "major disaster" by President Obama, a major disaster leave sharing plan may be established without regard to the general medical emergency requirement.
A major disaster leave sharing plan is a written plan meeting each of the following requirements:
- The plan allows a leave donor to deposit accrued leave in an employer-sponsored leave bank for use by other employees who have been adversely affected by a major disaster. An employee is considered to be adversely affected by a major disaster if the disaster has caused severe hardship to the employee or a family member of the employee that requires the employee to be absent from work.
- The plan does not allow a leave donor to deposit leave for transfer to a specific leave recipient.
- The amount of leave that may be donated by a leave donor in any year does not exceed the maximum amount of leave that an employee normally accrues during the year.
- A leave recipient may receive paid leave (at his or her normal rate of compensation) from leave deposited in the leave bank. Each leave recipient must use this leave for purposes related to the major disaster.
- The plan adopts a reasonable limit, based on the severity of the disaster, on the period of time after the major disaster occurs during which a leave donor may deposit the leave in the leave bank, and a leave recipient must use the leave received from the leave bank.
- A leave recipient may not convert leave received under the plan into cash in lieu of using the leave. However, a leave recipient may use leave received under the plan to eliminate a negative leave balance that arose from leave that was advanced to the leave recipient because of the effects of the major disaster. A leave recipient also may substitute leave received under the plan for leave without pay used because of the major disaster.
- The employer must make a reasonable determination, based on need, as to how much leave each approved leave recipient may receive under the leave sharing plan.
- Leave deposited on account of one major disaster may be used only for employees affected by that major disaster.
As with a general leave sharing plan, a leave donor who deposits leave under an employer-sponsored major disaster leave sharing plan will not realize income with respect to the deposited leave, provided that the plan treats payments made to the leave recipient as wages.
Due to the limited period of time after the major disaster that the leave can be deposited and used by affected employees, it may be prudent to establish a major disaster leave sharing plan related to Hurricane Sandy as soon as administratively practicable. As noted above, the Internal Revenue Service requires that such a major disaster leave sharing plan be in written form.
Employer-Based Tax-Free Relief
Pursuant to Section 139 of the Internal Revenue Code (the "Code"), employers can provide benefits on a tax-free basis to employees who are impacted by Hurricane Sandy. Therefore, an employer can provide cash or benefits to assist employees, and such "qualified disaster relief payments" are exempt from federal income tax and employment taxes. In addition, the employer is generally able to deduct the payments.
Qualified disaster relief payments within the meaning of Section 139 of the Code include payments received for the following expenses:
- Reasonable and necessary personal, family, living or funeral expenses incurred as a result of a qualified disaster;
- Reasonable and necessary expenses incurred for the repair or rehabilitation of a personal residence due to a qualified disaster; and
- Reasonable and necessary expenses incurred for the repair or replacement of the contents of a personal residence due to a qualified disaster.
However, qualified disaster relief payments do not include payments for expenses otherwise paid for by insurance or other reimbursements or income replacement payments (such as payments of lost wages, lost business income or unemployment compensation).
As with the establishment of a major disaster leave sharing plan, an employer wishing to offer tax-free relief to affected employees may want to consult with legal counsel to ensure that the requirements of Section 139 of the Code are satisfied.