Tax-free Disaster Relief Payment Program

In response to the ongoing pandemic, on March 13, 2020, President Trump declared the coronavirus or COVID-19 as a national disaster. This declaration activates a little-known existing provision of the tax law: Section 139 of the Internal Revenue Code. Section 139 allows employers to assist employees during a federally declared disaster with “qualified disaster relief payments” that are tax-free to the employee and fully deductible to the employer.

We have been helping our clients wishing to aid employees impacted by COVID-19 to adopt a Section 139 program to help their employees through these difficult times.


Added to the Internal Revenue Code after the September 11, 2001 attacks, Section 139 allows employers to make tax-free deductible “qualified disaster relief payments” to help employees in the wake of a qualified disaster. Section 139 is important because typically any payment from an employer to an employee, even a gift, is taxed to the employee as compensation. Section 139, however, provides that any amount received as a “qualified disaster relief payment” cannot be taxed to the employee as income. These payments are not subject to any federal withholding obligations and do not need to be reported on a Form W-2 or 1099. Any amounts paid as a “qualified disaster relief payment” are also deductible by the employer. In addition, in most cases, the exclusion will also apply for state income tax purposes.

A “qualified disaster relief payment” under Section 139 includes payments by an employer, not compensated for by insurance or otherwise, paid to or for the benefit for its employees 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.

Examples of COVID-19 “Reasonable and Necessary Expenses”

Section 139 has been utilized in the past for other Stafford Act disasters, and it was clear that during a natural disaster, like Hurricane Katrina, employer expenses paid to employees related to property repair and replacement, temporary housing, and food would be covered. However, the situation with COVID-19 is unique in that Section 139 has yet to be invoked for a disease pandemic. The IRS has not issued any guidance specific to COVID-19 and thus it is not entirely clear what types of expenses during this time will be considered “qualified disaster relief payments.”

Nevertheless, legislative history and a reasonable interpretation of the statutory text provides that the following payments or reimbursements from employer to employee should qualify under Section 139 provided the expenses are reasonable and necessary, relate to the COVID-19 pandemic, and are not otherwise compensated by insurance:

  • Medical expenses of the employee not covered by insurance or otherwise (i.e. copays incurred for COVID-19 treatment, deductibles, over-the-counter medicines and cleaning supplies);
  • Health-related expenses other than medical expenses (i.e. over-the-counter medications used to treat COVID-19);
  • Dependent care expenses, such as child care or tutoring expenses for an employee’s dependent due to school closures; remote learning or home schooling expenses, such as home internet, computer for use by a dependent, educational materials, subscriptions to online educational resources, etc.;
  • Expenses associated with working from home, including home office set-up costs, computer, internet, printer, and cell phone costs, and even increased utility costs on account of the home office;
  • Transportation expenses due to work relocation including costs associated with taking a taxi or ride-sharing app service from home due to mass public transport closures;
  • Critical care and funeral expenses of an employee or a member of the employee’s family, who dies from a COVID-19 infection; and
  • Other living expenses due to an employee’s know exposure to COVID-19 such as hand sanitizers and home disinfectant supplies.

Specifically excluded from “Qualified disaster relief payments” are payments for nonessential, luxury, or decorative items or services, and wage replacement payments such as sick pay, family medical leave pay, or any other type of salary or leave pay.

Employer Considerations 

Section 139 does not require an employer to have a written policy or program for “qualified disaster relief payments”, however, employers who wish to make “qualified disaster relief payments” due to COVID-19 should ideally a written policy or program to inform employees of the availability and parameters of such a payment program.

Any policy adopted by an employer in response to Section 139 should clearly document the features of the program, including the following:

  • a description of who is an eligible employee;
  • a listing of expenses that that will be subject to reimbursement or payment;
  • a per-employee allowance for reasonable expenses (i.e., $500 per month);
  • the method for reimbursement/payment
  • the start and end date of the program.

Payments are not required to be reported on a Form W-2 or Form 1099, and there is no specific limit on the amount of reimbursement that may be made to an employee, other than the requirement that the expense be reasonable and necessary. Employers do not need to collect receipts or other proof of expenses incurred by employees.


In light of the exigency and uncertainty caused by the COVID-19 pandemic, employers should look to Section 139 as a favorable and efficient mechanism to provide tax-free deductible supplemental assistance to employees. Section 139, which is a little-known oldtax provision, may be the best and easiest way for employers to assist their employees during these uncertain times.

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